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.

car service from Midway Burlington .. Lockport Chicago limo O’Hare

In The News:

Tech expert Kurt “CyberGuy" Knutsson says a malware app called SpyLend is posing as a financial tool, hitting 100,000-plus downloads.

Tech expert Kurt “CyberGuy" Knutsson says Clone Robotics’ Protoclone mimics humans with 1,000 muscles – too human for comfort.

Tech expert Kurt “CyberGuy" Knutsson urges you to use Apple’s App Privacy Report to see what your apps are really up to.

Tech expert Kurt “CyberGuy" Knutsson talks about how to smoothly transfer your data from an old laptop to a new one using cloud storage or external drives.

Kurt the CyberGuy offers tips to safeguard your personal information as scammers become more sophisticated with scam texts and other methods.

WeRide's unmanned electric delivery van, the Robovan W5, has 194 cubic feet of cargo space and can carry payloads up to about 2,205 pounds

Kurt the CyberGuy recommends deleting 16 browser extensions immediately in response to a report saying more than 3.2 million web users were affected by a security breach.

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

A robotics firm in China claims a robot has performed the world's first humanoid robot front flip, which is significantly more difficult than a backflip.

A digital ID may be even more secure than a physical ID. Storing your driver's license in your Apple Wallet is an ideal solution for commuters.

A cybersecurity firm has shed some light on just how common tax scams have become. Kurt the CyberGuy offers his advice for how to protect your refund.

Lifesize Plans offers immersive walk-throughs that allow customers the opportunity to tour a home's design before construction actually begins.

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

A man invested $4 million in bitcoin and lost it all with a single click when he was targeted by a vishing scam, which uses phone calls to trick people.

Expandable's Touchdown is a designer trailer that promises a luxury off-grid living experience and unfolds into a home in about 15 minutes.

Major employee screening company data breach affects 3.3 million people. Tech expert Kurt “CyberGuy" Knutsson explains what happened and gives five ways to protect your data.

Kurt “CyberGuy" Knutsson reveals mind-blowing tech that gives you sunlight on demand.

New malware "FrigidStealer" targets Mac computers. Tech expert Kurt “CyberGuy" Knutsson offers four ways to stay safe from infostealer malware.

Kurt “CyberGuy" Knutsson talks about how lab-grown muscles power a biohybrid hand for scalable prosthetics and research.

Reports of task scams have significantly risen in the past four years, according to the Federal Trade Commission. Kurt the CyberGuy offers some red flags.

iPhones have a hidden folder that eats up storage without you knowing it. Kurt the CyberGuy offers some tricks to free up storage on your device.

A recent ransomeware attack targeted Zacks, an American investment firm, and a cybercriminal claimed to have stolen records for millions of customers.

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

Researchers unveiled a new soft prosthetic hand that combines the natural coordination patterns of our fingers with the decoding of motoneuron activity in the spinal column.

Accidentally deleting a text message on your iPhone or iPad is not a problem if you still need the message. Apple has a built-in way to recover it.

The Perilous Franchise Agreement: What Did You Sign?

Small Business