5 Mistakes People Make When Signing A Franchise Agreement…
And How to Avoid Them
I’m Jeff Wheelock and I’ve been practicing franchise law since 1998. Over the past 22 years, I’ve written or reviewed franchise agreements for hundreds and hundreds of brands.
In my mind, franchising can be a great business opportunity. But franchise agreements are often traps for the unwary.
5. Of Course it’s Negotiable
My clients often tell me: “The franchisor said their franchise agreement is non-negotiable.” Frankly, that is rarely true.
In fact, even very large franchisors are often willing to negotiate some parts of their franchise agreements. Yes, there are a few terms that franchisors are especially reluctant to change – e.g. the initial fee or the royalty rates. But that still leaves room for a LOT of negotiation.
Here are a few examples of terms that can often be negotiated:
- Restrictions on your ability to sell your business
- Rights for additional franchises
- Indemnification
- Other fees & expenses
- And…
4. Territory, Territory, Territory
When people talk about real estate, you hear: “location, location, location.”
In franchising, your concern should be your PROTECTED TERRITORY. You want to make sure that another franchisee doesn’t move in too close to you. So your focus should be on size, as well as place.
On this particular point, franchisors and franchisees often have different motivators. Franchisors want to expand their empire, opening as many locations as possible. On the other hand, franchisees don’t want too much competition from another business that offers the exact same product or service under the same name.
Generally speaking, bigger is better for a franchisee.
And don’t assume that the size of franchisor’s “standard” territory makes sense for you. The value of “one-mile protection” makes more sense in downtown Manhattan than it does in the suburbs. Similarly, territories based upon the size of the “population” may be focused on the wrong metric. If you want to sell services to homeowners, what if a disproportionate number in “your population” lives in apartments?
3. “I DO NOT THINK THAT WORD MEANS
WHAT YOU THINK IT MEANS”
– Inigo Montoya, The Princess Bride
Franchise agreements are written by the FRANCHISOR’s attorneys. And some are written in a way such that you (and even attorneys that don’t practice franchise law) might not understand the meaning. Or you might not understand how certain future events will actually play out.
For instance, it is likely that your franchise agreement will make you liable for royalties and other fees for the full 10-year term of the contract … even if your business closes its doors (whether it’s your fault or not).
Other portions of your franchise agreement probably allow the franchisor to go after your personal assets if your business fails, even if you operate as a corporation.
Often when I explain the implications and meanings of these types of provisions, my clients sit back shaking their heads, saying: “I never would have caught that.”
You need to carefully review the terms of the contract. At a bare minimum, you need to go into this deal with your eyes wide open. Better yet, you can negotiate.
2. Move at your Own Pace
Here’s another one I hear from clients: “I have to hurry and sign because the franchisor might sell this territory to someone else.” My response: “Maybe, but I’m skeptical.”
Some franchise salespeople are pretty aggressive. I suppose that’s their job – to close deals.
But you need to move at YOUR own pace.
First, I’ll point out that it’s pretty hard for franchisors to find qualified franchisees. There are lots of people who SAY they are interested. But there aren’t a lot people who are ready and financially able to follow through. In fact, franchisors often pay a lot of money for sales-leads. So, YOU are the hot commodity. Don’t let them convince you otherwise.
Second, I have yet to see a “once-in-a-lifetime” franchise opportunity. Said differently, there’s always another deal. That is especially the case for relatively new franchised-systems.
Third, if you rush to close, you’re probably investing more with your heart instead of your head. You may not be performing appropriate due-diligence. You may not be giving adequate consideration to some of the risks. And you are certainly sending the message that the franchisor has all the leverage to say “no” to any of your proposed changes.I’m not suggesting that you stall or delay. But for many people, this is the biggest business deal of their lives. You will be committing to the deal for a long time (probably 10 years of more). You need to sign the franchise agreement when YOU are ready
1. Hire an experienced franchise
attorney to help you
You wouldn’t go to a dermatologist to perform your heart surgery. Yes, they both went to medical school. But one doesn’t have the expertise you need.
It’s the same with lawyers. Obviously, you wouldn’t go to a criminal lawyer for your divorce. You wouldn’t hire a personal injury lawyer to help with your business.
Franchise law is unique. It involves specific federal laws. It involves a unique culture, with its own unofficial norms and standards. Even most business lawyers have no experience in franchising.
That’s who you are looking for – a franchise attorney.
You want an attorney who deals with franchise agreements all the time. That way they know what’s common and uncommon. What’s typically negotiable and what’s not. What terms often lead to frustration and fights down the road.
If you hire an attorney who doesn’t focus on franchise deals, they don’t have the experience you need.
Have Questions?
Contact Jeff Wheelock
(713) 722-8118
jwheelock@dwlegal.com
This information contained on this web site is not intended to constitute legal advice. You should consult an attorney with regard to the particulars of your situation. Nothing on this web site is intended to create an attorney-client relationship between a person reading this article and the law firm. Visitors to this web site are cautioned not to transmit confidential, proprietary or privileged information via email. The attorneys herein are not certified by the Texas Board of Legal Specialization. They are licensed by the Supreme Court of Texas.