Buying a franchise has become one of the most popular avenues for people looking to escape the rigid workday of a 9 to 5 job and jump into the world of independent business ownership. After all, who doesn’t dream of being their own boss and controlling the limits of their own financial future? For anyone looking to act on their entrepreneurial spirit, franchising can offer many attractive qualities that can deliver excellent growth and earnings potential, as well as satisfy that longing for independence. On the other hand, people who jump into franchising too quickly without proper planning can find themselves in financial and legal trouble. Even the most sophisticated businessman can fall into this trap and be left struggling to understand exactly what he signed up for.
Buying a franchise requires not only a substantial investment of time and money, but also requires careful planning and research. You should thoroughly review all disclosure documents provided to you and take the time to interview current and former franchisees of the franchise system. These simple but important steps will often lead to many new questions to ask the franchisor and help you make an informed decision about which franchise is right for you. In particular, you should inquire about the types and amounts of initial and ongoing training, marketing, and advertising support that the franchisor provides. In fact, your monthly royalty payments should go toward more than just the licensing rights to the franchisor’s name. Those large payments should also subsidize the franchisor’s ongoing support and assistance, as well as brand enhancement to help you develop and maintain a thriving business.
Part of your careful planning and research should also include a detailed review of any documents the franchisor asks you to sign. Each franchise document has been prepared by an experienced team of attorneys and you should consider arming yourself with the same professional advice before signing on the dotted line. You should take the time to review and understand each term in your franchise agreement. Even seemingly benign words like “unique” or “reasonable” in terms of franchisor discretion can mean the difference between saving your business and losing your entire investment.
By taking steps to better understand what you’re signing up for, you’ll be better prepared to negotiate with your franchisor to include more favorable terms in your franchise agreement or, in some cases, avoid signing an extremely oppressive contract. While it is typical for your franchisor to negotiate some terms of the proposed franchise agreement, it is highly likely that many of the terms will be adhered to as written. Pay particular attention to clauses or phrases that seem one-sided. In other words, if the franchisor is allowed to do something, make sure you also have the same contractual rights. Other important clauses and terms may include any or all of the following.
restrictive covenants
Beware of restrictive covenants that may prevent you from continuing your support both during the term of your franchise and for a period of years after your franchise expires or otherwise ends. These terms are generally called non-compete agreements. These clauses can and often do work both ways. For example, if a franchisee is located next to you and he/she has entered into a restrictive agreement, he/she will not be able to operate for a certain period of time or within a certain radius of your store or other franchised stores after the termination or expiration of the agreement. . your franchise. On the other hand, if you are terminated or do not renew your franchise agreement, you could also be prohibited from operating a similar business for a period of time in a specified area.
Exclusive Territories
It is extremely important that you are given an exclusive territory in which to operate your franchise. If you don’t include this in your agreement, your bottom line could be substantially affected by encroachment by franchisees, corporate competitors, or both. Also, if your business involves sales, make sure your franchisor is not allowed to unreasonably compete with you through Internet sales. Competition online can be just as devastating to your business as having another store open next door.
Cross Default Provisions
Often, franchisors will include cross-default provisions in their franchise agreement. This means that a breach of one agreement can be construed as a breach of all agreements you have with the franchisor. This is particularly concerning if you own multiple franchised units that would allow your franchisor to close not one, but all of your stores, regardless of how profitable one may be over the other.
Lease acquisition clauses
Franchisors often require that in the event your franchise agreement is terminated, you have the right to enter and operate your store and take over your lease. This is extremely important for franchisees who wish to exit the system and operate a business completely separate from the leased space. By agreeing to this term, you may effectively waive any rights you may have to a prime location.
renewal rights
You should have the opportunity to renew your agreement or have the right to sell it for value. You don’t want to learn after ten or more years of hard work that you’ve simply “rented” a business and have no way to benefit from the development of your goodwill and your substantial investment of time, money, and effort.
Dispute Resolution/Site Selection
While no one wants to plan or even think about ending up in litigation with their franchisor, a smart business owner will always plan for the worst case scenario. Beware of clauses that force you to litigate in a specific forum. If you are in Virginia and your franchise agreement requires that all disputes be decided by arbitration in Arizona, be aware that the costs of having to defend or bring lawsuits against your franchisor will increase significantly. Also, try to avoid giving up your right to a jury; in most cases, juries will be much more receptive to a franchisee’s plight than a judge bound by law.
By learning in advance about the potential pitfalls that may arise, you’ll be better equipped to meet the challenges faced by many in today’s ever-growing and ever-changing world of franchising. In the long run, a small investment of time and money up front to understand exactly what you’re signing up for will better prepare you for the future of your franchise. More importantly, it will likely better equip you to maintain a long and prosperous relationship with your franchisor for years to come.
