Home
>
Small Business
>
The Perilous Franchise Agreement: What Did You Sign?

The Perilous Franchise Agreement: What Did You Sign?

Purchasing a franchise has become one of the most popular avenues for individuals looking to escape the rigid work day of a 9 to 5 job and take the leap into the world of independent business owner. 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 indeed offer many attractive qualities that can provide excellent growth and earning potential, as well as satisfy that longing for independence. On the other hand, individuals that jump into franchising too quickly without adequate planning can find themselves mired in financial and legal problems. Even the most sophisticated businessperson can fall into this trap and be left scrambling to understand exactly what they signed.

Purchasing a franchise requires not only a substantial investment of time and money, but requires careful planning and investigation. You should thoroughly review all disclosure documents provided to you and take the time to interview both current and former franchisees of the franchise system. These simple but important steps will often spur many new questions for you to ask the franchisor and assist you in making an educated 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 the franchisor provides. Indeed, your monthly royalty payments should go to more than just the licensing rights of the franchisor's name. Those hefty payments should also be subsidizing the franchisor's ongoing support and assistance, as well as brand improvement to help you develop and maintain a prosperous business.

Part of your careful planning and investigation should also include a detailed review of any document the franchisor asks you to sign. Every franchise document has been prepared by an experienced team of lawyers and you should consider arming yourself with the same professional advice and counsel before you sign on the dotted line. You should take the time to review and understand each term in your franchise agreement. Even the most seemingly benign words such as "sole" or "reasonable" in terms of the franchisor's discretion can mean the difference between salvaging your business and forfeiting your entire investment.

In taking steps to better understand what you are signing, you will be better prepared to negotiate with your franchisor to include more favorable terms in your franchise agreement, or, in some instances, avoid signing an extremely oppressive agreement altogether. While it is typical that your franchisor will negotiate some terms of the proposed franchise agreement, it is highly likely that it will hold fast to many terms as written. Pay particularly close attention to clauses or phrases that appear one-sided. In other words, if the franchisor is permitted to do something make sure you too are afforded 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 carrying on your livelihood both during your franchise term and for a period of years after your franchise expires or otherwise terminates. These terms are typically referred to as covenants not to compete. These clauses can cut both ways, and often do. For instance, if a franchisee is located next to you and he/she agreed to a restrictive covenant, they would not be able to operate for a certain time period or within a certain radius of their store or other franchised stores after termination or expiration of their franchise. On the other hand, should you be terminated or not renew your franchise agreement, you also could be prohibited from operating a similar business for a period of time in a specified area.

Exclusive Territories

It is extremely important that you be afforded an exclusive territory in which to operate your franchise. If you do not include this in your agreement your bottom line may suffer substantially from encroaching franchisees, corporate competitors, or both. Also, if your business entails sales, make sure you franchisor is not permitted to unreasonably compete with you through internet sales. Internet competition may serve to be just as devastating to your business as if another store opened next door.

Cross-Default Provisions

Oftentimes franchisors will include cross-default provisions in your franchise agreement. This means that a default under one agreement can be construed as a default under all agreements that you have with the franchisor. This is particularly troubling if you own multiple franchised units which would permit your franchisor to terminate not one, but all of your stores, regardless of how profitable one may be over the other.

Lease Takeover Clauses

Franchisors often require that in the event your franchise agreement is terminated, that it be entitled to come in and operate your store and take over your lease. This is extremely important for franchisees who may wish to exit the system and operate a completely separate business out of the leased space. By agreeing to this term, you may effectively give up any rights you have to a prime location.

Renewal Rights

You should be afforded the opportunity to renew your agreement or have the right to sell it for value. You do not want to learn after ten or more years of hard work that you simply have "rented" a business and have no way to profit from the development of your good will and your substantial investment of time, money and effort.

Dispute Resolution/Venue Selection

While no one wants to plan for or even think of ending up in litigation with their franchisor, a smart businessperson will always plan for the worst case scenario. Beware of clauses that require you to litigate in a specific forum. If you are located in Virginia and your franchise agreement requires that all disputes be decided through arbitration in Arizona, keep in mind that costs in having to defend or bring claims against your franchisor will be significantly increased. In addition, try to avoid waiving your right to a jury ? in most instances, juries will be much more receptive to a franchisee's plight than a law-bound judge.

By informing yourself upfront about the potential dangers that may lie ahead, you will be better equipped to deal with the challenges faced by many into today's ever-growing and ever-changing world of franchises. In the long run, a small investment of time and money up front to understand exactly what you are signing will better prepare you for the future of your franchise. Most importantly, it will likely better equip you to maintain an extensive and prosperous relationship with your franchisor for years to come.

Bradley J. Hansen, Esq., is an attorney in the Northern Virginia law firm of Hughes & Associates, P.L.L.C. Mr. Hansen's practice focuses on franchise, construction and complex civil litigation.

Brad is admitted to the Bars of the Commonwealth of Virginia and D.C. Prior to joining Hughes & Associates Brad practiced with a national litigation boutique law firm located in Washington, D.C. where his primary focus was on complex commercial litigation and franchise and distribution law. Brad has represented franchisees in state and federal courts throughout the country with regard to issues of encroachment, specific performance, fraud, monetary defaults, quality assurance defaults, wrongful terminations, franchise transfers and compliance with state and federal franchise laws.

Brad can be reached at brad@hughesnassociates.com or by calling him at 703-671-8200.

This article is not intended to provide legal advice, but to raise issues bearing on legal matters.

taxi to O'Hare Belle Rive .. Lockport Chicago limo O’Hare

In The News:

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

The number of people affected by a UnitedHealth data breach in February 2024 was actually higher than previously reported and was the largest medical data breach in U.S. history.

A phishing campaign uses Google Calendar to schedule fake meeting invitations that appear legitimate, redirecting targets to phishing sites.

Toll road text scam: Fake messages claim unpaid fees, seek payment via fraudulent links. Kurt “CyberGuy" Knutsson says this scam is becoming increasingly sophisticated and widespread.

Kurt “CyberGuy" Knutsson says these steps ensure that your friends and family get to the exact moment you want them to see. Try it out and streamline your sharing experience.

Tech expert Kurt “CyberGuy" Knutsson offers tips on how to protect your identity: Be vigilant, monitor accounts, use smart security, know theft response.

Tech expert Kurt “CyberGuy" Knutsson says cybercriminals are exploiting iMessage phishing protection, tricking users to reactivate links.

It's hard to imagine life without in-flight Wi-Fi these days – but sky-high web surfing comes with its own set of privacy concerns. Here's how to protect yourself.

Over 400,000 cases of credit card fraud were reported in 2024 to the Federal Trade Commission. The CyberGuy explains how to protect against becoming another victim.

A nondescript metal box transforms into a fully functional electric motorcycle that blurs the line between vehicle and urban infrastructure.

Many apps unrelated to location still ask users for tracking permission, and Texas Attorney General Ken Paxton has filed a lawsuit seeking to end this alleged practice by Allstate.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Melody, the artificial intelligence-powered robot, is life-sized and represents a move toward creating robots that resemble people in appearance and interaction.

Here are five easy smartphone rules from the National Security Agency that you can follow to better protect your mobile device from hackers and scammers.

A U.S. robotics company has developed "Jennie," a robotic pet powered by artificial intelligence that's designed to comfort those facing mental health challenges.

Healthcare records for more than 184 million Americans were breached in 2024, but you can take steps to minimize that risk. Kurt the CyberGuy explains.

The Skyrider X1 from Rictor claims to be the "first amphibious flying passenger motorcycle," and it combines land and air travel in one sleek design.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Home inventory and restoration apps help itemize and track every item in your home in the event you have to make an insurance claim after a natural disaster.

The White House launched a new cybersecurity safety label, the U.S. Cyber Trust Mark, intended to help consumers make informed decisions on smart device safety.

Today's tech can help make life so much easier — if you know how to use it. Here are a few tips on the quickest and best ways to make your phone, laptop and other devices work for you.

Tech expert Kurt “CyberGuy" Knutsson offers Windows 11 restart fixes: Update drivers, run system scans and check hardware.

Sony and Honda's Afeela 1 EV launches with advanced tech and entertainment for $89,900. Tech expert Kurt “CyberGuy" Knutsson gives his takeaways.

With limited hard drive space, tech expert Kurt “CyberGuy" Knutsson offers these tips for storing large video files and photos.

Tech expert Kurt “CyberGuy" Knutsson says the $236,000 Yangwang U9 electric hypercar boasts 1,287 horsepower and can jump obstacles.

The Perilous Franchise Agreement: What Did You Sign?

Small Business