This is the second part of our attempt to dispense some practical advice to business people (as opposed to lawyers). This one is for franchisees:
Reading the Fine Print When Reviewing Franchise Contracts
When it comes to franchise contracts, nothing is “standard.” It is always a good idea to thoroughly review the FDD package of contracts, no matter how lengthy. The owner is most likely not trying to pull a fast one over a potential franchisee. But certain concepts find their way into contracts that may pose a threat later in the relationship. Because of this, a potential franchisee in New York should always read through documents and consult with a lawyer before signing an agreement.
Lesser Known Default Provisions
Three Strikes:
A common clause in contracts is typically known as the “three strikes you’re out” clause. This provision allows franchisors to terminate contracts on the third infraction in 12 months, regardless of how small or big the missteps have been or even if they have been cured.
Another clause carries the same three-strike rule, but it spreads the infractions out over 10 years. When the time span is so broad, there are sure to be mistakes and mishaps, and a franchisee should not lose the business over a technicality.
Underreporting:
In many franchise agreements, if franchisees underreport gross sales by 2% or more on 3 separate occasions, the franchise can be terminated. A 2% variation is very easy to make inadvertently.
Confidential Information:
If an employee (not the franchisee and not even with the franchisee’s knowledge) reveals confidential information, the franchise can be terminated.
Late Opening:
Failure to open by a certain date can be grounds for termination.
Speaking to Other Franchisees
Franchisees can talk with other franchisees about any “hidden” language to be aware of in a franchise agreement. Other franchisees who are experienced at running a business will know what problems they have encountered as it relates to their agreement. They may also offer advice on what they would’ve done differently or better.
Reviewing the Contract
It is always good to have a franchise lawyer review every contract before it is signed. The upfront investment is sure to pay-off in the future.
Source: The Globe and Mail, “Be wary of default language in franchise deals,” Tony Wilson, May 22, 2012