When you buy a franchise, it is easy to focus on short-term considerations: How much is the initial investment? How long will it take for you to open for business? How soon can you reasonably expect to turn a profit? While these are all undoubtedly important factors, there are several long-term factors you need to consider as well.
Whether you intend to operate your franchise for as long as possible or you are hoping to build a business you can sell, there are several important provisions of the franchise agreement that should weigh into your buying decision. Some of these factors include:
1. Renewal Rights and Conditions
Franchise agreements typically include numerous strict and franchisor-friendly conditions on the franchisee’s right to renew. When reviewing the franchise agreement’s renewal provisions, some of the key factors to assess include:
- How much is the renewal fee?
- Does the franchise agreement provide for unlimited renewals?
- Do the renewal conditions essentially give the franchisor subjective control over your right to renew?
2. Transfer Rights and conditions
Similar considerations apply to the franchise agreement’s transfer provisions. Most franchise agreements require payment of a transfer fee (which can often be negotiated between the franchisee and the buyer) and impose various other conditions on the franchisee’s right to transfer. Many franchisors will also demand a right of first refusal, which can be a turn-off to prospective buyers.
3. Grounds for Termination
Ideally, you will find success as a franchisee, and you will never have to think about the possibility of early termination. However, not all franchises are successful, and many factors related to your potential success as a franchisee will be beyond your control. As a result, when buying a franchise agreement, it is important to consider the implications of the agreement’s termination clauses. For example:
- What “defaults” provide grounds for termination of your franchise?
- Do you have a sufficient opportunity to cure before being terminated?
- Do you have any early termination rights as the franchisee?
4. Lost Future Royalties
Franchise agreements will often include provisions for liquidated damages, also known as “lost future royalties.” If the franchisor terminates your franchise and you are subject to an obligation to pay lost future royalties, this could mean facing substantial liability long after the relationship is over.
5. Other Post-Termination Provisions
In addition to liquidated damages provisions, franchise agreements will often include a number of other post-termination obligations as well. Common clauses include:
- Non-competition clauses that prevent the franchisee from operating a similar or competing business within a specified geographic region.
- Non-solicitation clauses that prevent the franchisee from contacting its customers, even for non-competing business purposes.
- Non-disclosure clauses that prevent the franchisee from discussing its experience with others or from making use of the knowledge gained as a franchise owner.
Fixed-Fee Franchise Business Reviews for Prospective Franchisees
If you are thinking about buying a franchise, it is important to have the Franchise Disclosure Document (FDD) and franchise agreement reviewed by an experienced franchise attorney. To inquire about our fixed-fee franchise business review services, please call 202-293-3947 or contact us online today.
