If you are thinking about buying a franchise, you know that you need to make an informed investment decision, and you know that you need to go into your franchise opportunity eyes wide open. But, do you know what this actually entails? While most prospective franchisees have a general idea of the financial risks involved with buying a franchise, far fewer have an appreciation of the legal risks that have the potential to place their entire investment in jeopardy.
What kinds of legal risks are we talking about? Here are five important legal issues not to overlook when pursuing a franchise opportunity:
Issue #1: Inadequate Territorial Protections
What is your understanding with regard to your territorial rights? Are you to receive an “exclusive” or “protected” territory? If so, what do these terms really mean? While lots of franchisors offer their franchisees some form of territorial protection, protections vary greatly between franchise systems, and you need to make sure your franchise agreement clearly defines the rights you are being granted.
Issue #2: Insufficient Protections for Renewal
When the initial term of your franchise agreement expires, will you have the ability to renew? While it is fairly standard for franchisors to offer their franchisees renewal rights, these “rights” are usually contingent upon satisfying a broad range of requirements. If the conditions for renewal in your franchise agreement are too franchisor-friendly, you may find yourself on the outside looking in when your initial term expires.
Issue #3: Termination Risks for Late Payments and Other Breaches
What happens if you are late making a royalty payment? What if you inadvertently use outdated marketing materials or sell an unauthorized product or service? While these types of issues shouldn’t but your franchise at risk, they very well could under the terms of your franchisor’s standard franchise agreement.
Issue #4: Unfair Dispute Resolution Provisions
Most franchise agreements include provisions that specify where and how disputes between the franchisor and franchisee are to be resolved. While this might seem fairly irrelevant or inconsequential at this stage, you need to think very carefully about committing to mediation or arbitration (at your cost) in the city where your franchisor’s headquarters are located. If you do, the costs of pursuing legal action could end up being prohibitive should you need to assert your legal rights.
Issue #5: Limited (or No) Enforcement Rights as a Franchisee
Finally, as a franchisee, what rights do you have to enforce the terms of your franchise agreement? Most standard franchise agreements are heavily one-sided in favor of the franchisor; and, if you are going to have any rights at all, it is going to be as a result of your efforts to negotiate them into your franchise agreement.
Thinking about Buying a Franchise? Consult with Franchisee Lawyer Jeffrey M. Goldstein for Free
Jeffrey M. Goldstein is a franchisee lawyer who has been helping his clients buy franchises for more than 30 years. Are you considering a franchise opportunity? Call 202-293-3947 or contact us online to arrange a free and confidential consultation.
