Whether you love cars or you are looking for a recession-resistant franchise with the potential for repeat business and a high sales volume, buying an automotive franchise presents both opportunities and risks. From seeing your customers every 3,000 miles to facing lawsuits when your customers’ cars break down and cause accidents, there are numerous factors that can increase both profit potential and liability exposure for automotive franchise owners.
Here are four important legal considerations for purchasing an automotive franchise:
1. Liability for Employees’ Mistakes
For automotive service franchises, such as oil change centers and repair shops, hiring well-trained and highly-skilled employees is of critical importance. When it comes to working on cars, trucks and SUVs, even minor mistakes can have drastic consequences. If one of your employees under-torques a drain plug or fails to properly bleed a customer’s brakes and the customer gets injured (or injures someone else) in an accident as a result, then your franchise could be in the line of fire.
In addition to thoroughly vetting service employees, purchasing adequate insurance coverage can be critical to protecting an automotive franchise from business-threatening liability. Insurance policies should be crafted to meet the unique needs of the franchise, including both coverage limits and covered perils.
2. “Chain of Distribution” for Mandatory Products and Suppliers
As a retail business, your automotive franchise will be in the “chain of distribution” for purposes of the law of product liability. This means that, if you sell a defective product that ends up causing an accident, your franchise could be sued even if you had no knowledge (and no reason to know) of the defect. While many businesses can control this risk to an extent by choosing their suppliers, if your franchise agreement includes a mandator purchase or mandatory supplier provision, you may have no control over the source of the products you sell.
3. Marketing and Competition (Interbrand and Intra-Brand)
As a franchisee, you will have the ability to benefit from your franchisor’s brand recognition. However, you will also likely be limited to using the franchisor’s marketing materials (or else you will need to wait for approval before using your own). The automotive service and retail industries are also highly competitive; and, depending on the scope of your territory, you could face competition from other franchisees within the system and from other brands.
4. Term and Renewal
Buying an automotive franchise is an investment, and one that you will need to recoup over time. With this in mind, the initial term of your franchise agreement is important. You need to have enough time to build a profitable business; however, you also need to avoid locking yourself in for longer than necessary. When it comes time to renew, you also need to ensure that you will be able to extend the term of your franchise if you want (or need) to do so.
Speak with National Franchise Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise lawyer who exclusively represents franchisees and dealers. If you are thinking about buying a franchise and would like more information about the legal risks involved, you can call 202-293-3947 or contact us online to learn more about our fixed-fee franchise business reviews.
