When you buy a franchise, your relationship with the franchisor is governed by the terms of your franchise agreement. This is a long, complex and legally-binding document, and signing a franchise agreement can put you in an untenable situation if you aren’t careful. As a prospective franchisee, you need to make informed decisions throughout the buying process—and this includes making informed decisions about the terms to which you are willing to agree.
What Do You Need to Know About Your Franchise Agreement?
So, what do you need to know about your franchise agreement? Here are 10 important facts for prospective franchisees:
1. The Franchise Agreement is Written By Your Franchisor’s Lawyers
The first thing you need to know is that your franchise agreement is not a “standard” document. While there are certain standards in franchising, each franchisor’s franchise agreement is written by the franchisor’s lawyers. These lawyers have the franchisor’s best interests in mind, and they have an ethical obligation to protect the franchisor’s legal and financial interests by all means available.
This means that the franchise agreement is heavily one-sided. It is designed to protect the franchisor—which means that it is designed not to protect you. With this in mind, you need to be very careful, and you need to ensure that you have a clear and comprehensive understanding of the terms to which you are agreeing.
2. The Franchise Agreement is Negotiable
Franchisors know their franchise agreements are one-sided, and, as a result, they expect sophisticated prospective franchisees to negotiate. No matter what you may have heard, franchise agreements are negotiable.
3. Some Terms Are More Negotiable Than Others
But, while franchise agreements are generally negotiable, some terms are more negotiable than others. For example, while franchisors may be willing to compromise on things like opening deadlines and conditions for renewal, most won’t be willing to accept changes that affect their ability to enforce system standards. Franchisors are typically protective of their termination rights as well, although it will be possible to negotiate heavily one-sided termination provisions in some cases.
4. The Franchise Agreement “Incorporates” the Operations Manual
Along with the franchise agreement, you will also have to comply with the terms of your franchisor’s Operations Manual. In virtually all cases, franchisors “incorporate” their Operations Manuals into their franchise agreements by reference. This means that the Operations Manual is effectively part of the franchise agreement. This is true even though you have never seen it and even though it is subject to change over time.
5. The Franchise Agreement is Binding
Perhaps this could go without saying, but once you sign a franchise agreement, your signature is binding. You can’t back out (unless you negotiate an exit with your franchisor), and if your franchise isn’t a success, you can’t simply walk away. In addition to locking in franchisees for several years, many franchise agreements also include provisions for “lost future royalties,” which means that franchisees must pay their franchisors even if they go out of business.
6. The “Boilerplate” Terms are Important
While most prospective franchisees will skip right over the “boilerplate” terms in their franchise agreements, these provisions are incredibly important. In fact, they are some of the most important provisions in the entire document. If you agree to unreasonable terms regarding things like indemnification, integration and dispute resolution, you could face significant risks and limited options for enforcing your legal rights.
7. Your Franchisor Has Broad Termination Rights (and You Don’t)
As a franchisee, you won’t have an easy way out of your franchise agreement. Your franchisor, on the other hand, will have plenty of options for terminating your rights if your franchise is unsuccessful or you prove to be a “problem franchisee.” Most franchisors reserve broad termination rights—including rights to terminate without an opportunity to cure in some cases—and, once you are out, you will likely be subject to various post-termination restrictive covenants.
8. The Franchise Agreement Could Require Expensive Dispute Resolution
Another way franchisors use their franchise agreements to protect themselves is by requiring franchisees to agree to mandatory arbitration and venue clauses. While arbitration is supposed to offer a more streamlined alternative to litigation, going through arbitration can still be incredibly expensive—especially when franchisees are forced to travel to protect their rights. So, even though a mandatory arbitration clause may appear neutral on its face, the reality is that franchisors use these clauses to dissuade their franchisees from pursuing legal action.
9. The Franchise Agreement Could Leave Important Issues to Interpretation
Despite having dozens of pages of legal text, many franchise agreements still leave important issues open to interpretation. From imprecise wording to issues going overlooked entirely, there are various reasons why. As a prospective franchisee, you need to know what you are signing. If the language of your franchise agreement is unclear, you should rely on your lawyer to ensure that both parties have consistent and accurate understandings of their respective contractual rights and obligations.
10. The Franchise Agreement Isn’t Necessarily the Agreement You Will Sign Upon Renewal
If your business is a success, you will want to renew your franchise when your initial term expires. But, even if this is just two or three years down the line, the franchise agreement you sign now won’t necessarily be the agreement that governs your renewal term.
This is because franchisors typically require franchisees to sign their “then-current” franchise agreement at the time of renewal. This agreement could have terms that are materially different from those in your initial franchise agreement, and you could be left with little choice but to accept if you want to keep your franchise for another term.
Request a Free Consultation About Your Franchise Opportunity
If you are thinking about buying a franchise, it is extremely important that you hire an attorney to review and negotiate your franchise agreement. To discuss your franchise opportunity with attorney Jeffrey M. Goldstein, call 202-293-3947 or request a free initial consultation online today.