Some Points to Consider Before Signing a Franchise Agreement
Many of our blog commentaries address franchisor concerns. We also represent franchisees. We offer these observations to that constituency concerning the most crucial step in forming that relationship.
When buying a franchise, it is important to review the franchise agreement with an attorney, preferably one with experience in franchising. This is true regardless of whether the terms of the franchise agreement are ultimately negotiated. It is imperative that you understand the parameters of your relationship with the franchisor. Prospective franchisees sometimes focus only on the products and/or services they will be selling and the fees they will be paying the franchisor. They often do not fully review and understand the terms of the franchise agreement or their future relationship with the franchisor. This can result in dissatisfaction to the franchisee and cause substantial investment losses.
For instance, when purchasing a franchise, you may have the right to operate the franchise for a certain term such as five or ten years. But what happens at the end of that term? Does the franchise agreement provide you with a “right to renew”? And if so, what does that really mean? Are there conditions attached to the right to renew? Will you have to sign a new form of franchise agreement? Can that agreement contain new and increased fees? In what other ways may it differ from your initial agreement with the franchisor? If you are not allowed to renew the agreement, what happens to the value of your business? Will you receive any benefit from the years of operating your business? It is important to fully understand what will happen to your business and investment at the end of the term of the agreement.
Another point to consider is whether you will have the right to terminate the franchise agreement. Prospective franchisees often assume that if the business is not successful, the franchisee can simply close the doors and walk away as it would be able to do with an independent business. However, that is rarely the case in franchising. If the franchisee stops operating the franchise before the end of the term, he or she may be liable to the franchisor for its damages arising from the premature termination of the franchise agreement. Be sure to understand whether and on what grounds you have the right to terminate the agreement.
It is true that one of the benefits to buying a franchise is that the franchisee is buying into a proven system with a known name. Presumably, the franchisor has created a system and worked out the kinks before franchising the business. However, the franchise agreement is likely to provide the franchisor with the right to maintain control of the system. That control may include the right to require you to make modifications to your franchised business during the term of the agreement. These modifications can be quite costly and may include changes in equipment, computers, even changes to the brand name which may require new signs, new uniforms, new office supplies, and the like. While these modifications may ultimately benefit the system, you will be required to implement these changes at a time and cost determined by the franchisor without regard to your situation. It is important to realize that these unlimited costs may be imposed by the franchisor at any time during the franchise relationship.
These are just a few of the contract terms you should review with your attorney prior to purchasing a franchise. Buying a franchise can be a wonderful opportunity for owning a business with a proven brand and concept. Just be sure to understand the entirety of your relationship with the franchisor so that you ensure that the opportunity is right for you.