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.

---

Collection Agency Selection

Frankly, given the legal and regulatory requirements involved in attempting... Read More

Truck Wash Business Case Study

Often smart entrepreneurs look for out of the way businesses,... Read More

Small Business Opportunities And The Tens

You may find this Newsletter a little long winded but... Read More

How to Use Graphs and Charts in Your Business Plan

Many people ask how many graphs or charts they should... Read More

How To Build Business Credit

Having their own business is something many millions of people... Read More

The Business Autopsy: A Fact Of Life

Last week we discussed the importance of performing an autopsy... Read More

Starting a Pressure Washing Business

Are you thinking of starting a small pressure washer business... Read More

Will Adding a Car Wash to Your Fast Lube Add Additional Crime to Your Facilities?

Car Wash Crime in the Hood. Apparently not everyone is... Read More

Todays Chef, Tomorrows Restaurateur -- Startup Tips by Restaurant Consultants Inc

Researching information for a recent business plan, I came across... Read More

Do You Want Your Own Fully Programmable ERP? - Part 2

In the first article we mentioned the main characteristics that... Read More

Home Based Franchise Case Study

Here is an interesting case study of a company, which... Read More

Why You Need A Virtual Assistant

How much is your time really worth? Is it worth... Read More

25 Valuable Phone Numbers For Small Businesses Success

Starting and growing a small business can be a daunting... Read More

How to Manage Your Pipeline

How is your pipeline structured?I assume most of you have... Read More

Small Business Owners - Form a Relationship with Your Bank Manager

It's just like a marriageTo expect a bank manager or... Read More

How to be Annoyed and Make Money

When do annoyances in a relationship become too much to... Read More

Small Businesses With Work Trucks; A Warning

If you are a non-operator owner of many work trucks,... Read More

How to become a Career Coach for Profit

A career coach could be simply defined your job seeking... Read More

Small Business and Over Regulation

Over regulation of small business is so intense it is... Read More

How to Start a Paper Shredding Business

Paper Shredding Business Opportunities are blossoming up everywhere because in... Read More

Accounting Methods ? Cash and Accrual

When starting a business, you have to determine the method... Read More

Nevada Incorporation: The Advantages of Incorporating in Nevada

Incorporation in Nevada has become an attractive option for savvy... Read More

Keep TRACK of your Business Relationships and Gain Profits

How do you know when an alliance needs to be... Read More

Mobile Car Washes and Shoe Policies

Mobile carwashing is hard work, it is tough on the... Read More

How to Write a Credit Policy for Your Business

The book, "Become the Squeaky Wheel," by New Hampshire author... Read More

Starting a Small Business? ?Tips from a Veteran

Congratulations, you are starting a small business! You are taking... Read More

Aircraft Washing Business Tip - Interior Private Jet Cleaning

Aircraft Interiors of personal and corporate jets have hundreds of... Read More

Business Development Is Not An Event

Cash flow. To stay in business, you've got to keep... Read More

Should I Franchise or Not?

A reader of one of my online sessions asked should... Read More

Take a Break - Have a Pity Party

Pity parties are nothing new. In fact, we do it... Read More

Arranging Your Fundraiser

When deciding to host a fundraiser for your company or... Read More

7 Essentinal Resources for Small Business

So you want to start a business but you don't... Read More

Be Prepared When Business Investors Look Beyond Your Business Plan

You have spent considerable time pulling your business plan together,... Read More