There are a number of obvious risks involved in buying a franchise: Your business could fail. You could lose your investment. You could end up in litigation with your franchisor.
But, along with these risks, there are a number of hidden risks as well. As a prospective franchisee, here are five important legal considerations to keep in mind:
1. The Franchisor Could Be Facing Bankruptcy or Costly Litigation.
When you looked at your franchisor’s Franchise Disclosure Document (FDD), did you spend much time looking at Items 3 and 4? Probably not. These early Items are frequently overlooked, but they can provide critical insights into a franchisor’s solvency and financial stability.
If your franchisor files for bankruptcy or incurs a substantial judgment in litigation, this could have devastating consequences for the franchise system as a whole. Unlikely as this may be, it is not a risk to be ignored completely.
2. The Franchisor’s Principal Trademark Could be in Jeopardy.
If you are like most franchisees, one of your primary considerations in choosing a franchise was the recognizability of the franchisor’s brand. In legal terms, a brand is known as a “trademark,” and franchisors can lose their trademark rights under a variety of different circumstances.
Ideally, your franchisor should have its principal trademarks registered with the U.S. Patent and Trademark Office, and it should be actively monitoring and enforcing its trademark rights. If your franchisor’s trademarks lose their exclusivity, you could lose the right to use them as well.
3. Your Territorial Protections Could be Incomplete.
While many franchisors promote their “exclusive” and “protected” territories, their franchise agreements often tell very different stories. Even territories marketed as “exclusive” are often subject to intra-brand competition from one source or another, and ambiguities in your franchise agreement could raise very real questions about your territorial protection.
4. The Operations Manual Could Impose Costly and Undesirable Obligations.
While franchisors are required to provide prospective franchisees with a copy of their FDD and franchise agreement, they are not required to disclose the contents of their operations manuals. These documents are typically lengthy and extremely detail-oriented, and they can impose onerous obligations that are not readily apparent from the franchisor’s other documentation.
5. You Could Be Forced to Make Costly “Upgrades” and “Improvements” Over Time.
In the “Franchisee Obligations” section of your franchise agreement, there is likely a clause which states that you must perform any upgrades or improvements that the franchisor requests at your own expense. Many franchisors use this open-ended obligation liberally, and many franchisees find it difficult to bear the financial burden of adopting upgrades and improvements which they may or may not think are the best solution for their business.
Free Consultations and Fixed-Fee Franchise Business Reviews
If you are thinking about buying a franchise, you can contact a skilled franchise lawyer for a free, no-obligation consultation about the hidden risks involved. To schedule an appointment, call (202) 293-3947 nationwide or request more information online today.
