When buying a franchise, one of the most important steps in the due diligence process is to carefully review the franchise agreement. The franchise agreement governs the terms of the relationship, and it covers everything from the opening deadline to the franchisee’s obligations post-termination. Given the importance of the franchise agreement – in addition to its density and complexity – the best way to ensure that you understand its terms is to hire a franchise lawyer to review it for you.
But, even when you hire a franchise lawyer to review your franchise agreement, it is still a good idea for you to review it as well. When you do, keep a lookout for these seven issues, which prospective franchisees commonly overlook during the buying process:
1. Opening Conditions
Your franchise agreement almost certainly includes an opening deadline, and it also almost certainly includes conditions that need to be met before you can open for business. Are all of these conditions within your control; or, will you be relying on your franchisor, vendors or others to allow you to open on time?
2. Consequences of Failure to Open
If you are unable to open your franchise in time for any reason, you could be at risk of losing your franchise rights. Franchise agreements typically include provisions for termination in the event of failure to open, and these provisions often give franchisees little (if any) room for error.
3. Renewal Conditions
If your franchise is successful during the initial term of your franchise agreement, you will probably want to renew. With this in mind, you should carefully review the franchise agreement’s renewal conditions and make sure you know what you need to do (and when you need to do it) in order to extend your franchise.
4. Transfer Conditions
In addition to opening and renewal conditions, franchise agreements almost universally include transfer conditions as well. If you want to sell your franchise, you will need to satisfy all of these conditions before doing so.
5. Dispute Resolution
Is your franchise agreement subject to mandatory mediation or arbitration (or both)? Where will you need to travel to resolve any disputes, and how much will you have to pay? While you might be on good terms with the franchisor now, these are not concerns you can afford to ignore.
If an issue with your franchise leads to a lawsuit against your franchisor, the indemnification clause in your franchise agreement means that you will need to cover the costs of the litigation. While limited indemnification rights are warranted, franchisors often significantly overreach in shifting liability to their franchisees.
7. Post-Termination Covenants
Finally, when the franchise relationship ends, what rules and restrictions will apply to your next business endeavor? Here, too, while some reasonable restrictions are warranted (i.e. a prohibition on using the franchisor’s trade dress), franchisors often overreach, and this means that prospective franchisees need to negotiate in order to protect their interests down the line.
Get Help with Your Due Diligence from National Franchise Lawyer Jeffrey M. Goldstein
The Goldstein Law Firm is a national franchise law firm that offers fixed-fee franchise business review programs to prospective franchisees. To learn more from franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or inquire online today.