Legal Aspects of Buying a Real Estate Franchise

Legal Aspects of Buying a Real Estate Franchise

Due to today’s strong real estate market we have observed a significant increase in the number of investors buying and selling real estate brokerages, especially those that use a franchise model.  The real estate brokerage industry is worth $155 billion and it is growing rapidly.

Investors are excited to get into real estate and make some money. They are looking into how to buy a real estate franchise that they can easily manage and own. Buyers need to understand that they are actually signing two contracts before they sign on the dotted line.

The first contract will be purchasing an existing business from its owner. The second contract will be purchasing franchise rights from a franchisor. These types of transactions can lead to legal issues for franchisees if not careful.

Here is a list of important items to consider before buying a real estate franchise.

1. Re-Imaging and Brand Obligations. A purchaser needs to understand whether the seller is in compliance with the franchisor’s brand guidelines and requirements. If the business being sold is not in compliance with the franchisor’s current brand or image requirements, the franchisor will often require that the buyer “re-image” the business and bring it up to current brand standards. A purchaser must understand what is required and determine which party will bear the re-imaging or brand compliance costs.

2. The Approvals and Transfer Process – Most franchise agreements prohibit the sale of the franchise without prior approval from the franchisor. This restriction means that the seller and the buyer should inform the franchisor about any potential sale as soon as possible. The buyer will ask the franchisor for approval of the transaction. They will also need to find out if there are any conditions attached. The process of selling a franchise is usually outlined in franchise agreements.

3. Fees –  Most franchise agreements require payment to the franchisor to allow the transfer to take place. The seller and purchaser must agree to pay the transfer fee.  There will also be fees for every time you help a client sell or buy a home.

4. The Franchise Agreement – Many franchisors require that purchasers sign the most up to date form of the franchise agreement. They do not allow the purchaser to assume an existing franchise agreement. It is important that the purchaser reads both agreements to understand the differences. The purchaser may not be able to negotiate the franchise agreement. However, it is important that the purchaser understands the terms of the existing franchise agreement as well as the new terms that the purchaser must agree to.

5. Leases and the terms of the franchise. Sometimes, the terms of the franchise agreement and the lease term are incompatible. If the franchise agreement has a 10-year term but the lease only has 3 years left, it is crucial that the purchaser gets a lease extension to match that term.

Conclusion

Real estate franchises are very popular and are an excellent way to get into the business. A franchisor grants the right to use its name in return for a fee. This “fee”, which is usually a percentage of the real estate closings by the franchisee, and it is part of a long list of fees.  If you are thinking about purchasing an existing real estate franchise, you will want to consider the non-exclusive list of items noted above to make sure you are ready to own a real estate franchise.

Please contact Hood Law with any questions you may have regarding real estate law.

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