Providing independent legal advice to intended franchisees
Starting any new business can be a daunting experience without the right help, regardless of whether you’re inexperienced or a seasoned entrepreneurs. If you’re looking at buying into a franchise, you’ll need to pay special attention to the franchise agreement and disclosure documents to understand your rights and obligations under that franchise. After all, that’s what’s going to be controlling your franchising life.
To help you along this journey and aside from all other requirements determined by law, you must obtain independent legal advice before you enter into the franchise agreement. We assist many clients who have taken up franchises in various industries, especially the fast food business – but we’ve also consulted just as many clients who have had issues with their franchises and franchisors, or who have wanted to exit the franchise because it’s not as easy as they had initially thought.
They key is about choosing your franchise carefully. Understand what the franchise is offering to you and how they’re going to support you. What’s the value of the franchise? That’s what you’re paying them for, isn’t it? In most cases, your accountant will also be a good source of advice in relation to your future plans of being a franchisee and the business goals that you’re setting for yourself.
Starting up a business can be challenging. While it is important to try to get the business up and running as soon as possible, a lot of entrepreneurs fall into the trap of not paying attention to matters that, if left unattended, may cause problems in the future. An example of these sorts of matters is matters that involve legal documentation, such as confidentiality and non-disclosure agreements, terms of trade, and partnership or shareholder’s agreements.
One of the commonly missed steps in setting up a business is a shareholder’s or partnership agreement. This is used in a situation where there are two or more entrepreneurs working together in a business. Whichever agreement is used depends on the structure of the business, however the best time to prepare the agreement is right at the start of the business, before any disputes arise between the parties.
One of the matters that a shareholder’s agreement deals with is in regard to exiting the business. This may happen due to retirement, disability or even death. In the instance of a shareholder retiring, the shareholder’s agreement may give the other shareholders the option or first right to purchase the shares.
In the instance where a shareholder has passed away, the shares may be of little value to any other party other than the other shareholders. This can result in the shares being sold to other parties at a fraction of what they may be worth. In such a circumstance the shareholders agreement may specify that the other shareholders must compulsorily purchase the shares.
As many of the matters that a shareholder’s agreement covers is typically not covered by the company’s constitution, a shareholder’s agreement operates as a supplement to the company constitution. An ideal agreement deals with issues that have a distinct possibility of arising during the life of a business. It can also provide for a mechanism which resolves those same issues without the need of court intervention.
A shareholder’s agreement can include provisions regarding:
- Direction and type of business undertaken
- Meeting Procedures
- Policies, Management, and Structure
- Procedures of appointment of directors or executives
- Voting rights and what decisions require votes
- What decisions are considered major decisions and what percentage of votes are required to pass these decisions
- The rights of minority voters
- Breaking deadlocks
- Shareholder’s exit strategies (including what happens if a shareholder passes away)
- Shareholder’s warranties
- Confidentiality agreements
- Restraint of trade
- Dispute Resolution
In summary, a shareholder’s agreement can deal with a wide variety of matters that may arise in the life of a business. The failure to address these issues can lead to expensive litigation or even to the failure of the business itself. It is therefore very important to have these matters dealt with early. Don’t leave these matters to chance or ignore it just because there are no problems at this point in time. You never know what is around the corner.