There are lots of important factors to consider when buying a franchise. While most prospective franchisees will pour over the numbers and spend hours evaluating potential locations, relatively few give due consideration to the terms of their franchise agreement. As Chicago franchise agreement lawyer Jeffrey M. Goldstein explains, this can prove to be a costly mistake.
Prospective Franchisees Need to Know the Terms of Their Franchise Agreement
As a prospective franchisee, you need to know the terms of your franchise agreement. Not only will your franchise agreement impact virtually all aspects of your operations, but it will also impact your rights upon renewal, transfer and termination. If you do not know what you are signing, there is a very good chance that you will give up important rights and put your assets at risk unnecessarily.
Consider these five commonly overlooked franchise agreement terms:
1. Modification of the Operations Manual
Franchisors incorporate their Operations Manuals into their franchise agreements by reference. What this means is that the terms of the Operations Manual are binding just as if they were written into the franchise agreement itself—even though you don’t get to see the Operations Manual before you sign.
Even worse, franchisors almost universally reserve the right to modify their Operations Manuals “from time to time.” When this happens—which it will—you will be required to comply with your franchisor’s modified system standards at your expense.
2. Territorial Restrictions
Even if you receive a protected or exclusive territory (which may or may not be the case), your franchise agreement will likely include territorial restrictions. For example, there is a good chance that you will be prohibited from advertising outside of your territory. Even if there are no other franchisees around, your franchisor may still want to “reserve” the surrounding areas so that they remain attractive to new prospective franchisees.
3. Conditions for Renewal
Franchise agreements routinely impose several conditions for renewal. If you do not satisfy all of the renewal conditions (as judged by your franchisor), you could lose your franchise at the end of your initial term.
4. Default and Termination
Franchise agreements’ default and termination clauses are almost always heavily one-sided. Before you sign a franchise agreement, it is imperative that you have a clear understanding of the issues that can lead to the loss of your franchise rights. If your franchise agreement is too one-sided you may need to negotiate the terms prior to moving forward.
5. Post-Termination Covenants
It is critically important that you understand your franchise agreement’s post-termination covenants as well. These are the terms that will continue to apply after your franchise is over. It is fairly standard for franchisors to impose non-solicitation and non-competition covenants (which are often extremely broad), and many franchisors will seek to hold their terminated franchisees responsible for “lost future royalties.”
Discuss Your Franchise Opportunity with Chicago Franchise Agreement Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchise in Chicago, we encourage you to contact us for more information. To discuss your franchise opportunity with Chicago franchise agreement lawyer Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free consultation online today.
