Many franchise agreements contain a very important clause that is easy to overlook if you aren’t careful. This clause—which may or may not be clearly labeled—specifies the amount of time that the franchisee has to open for business.
If you hire a franchise attorney to review your franchise agreement, your attorney will most likely point out this clause when discussing the risks involved with moving forward. This is because the consequences of failing to open on time can be significant—up to and including termination of the franchise agreement in most cases. If you cannot meet the deadline for any reason, you can lose your franchise before you even have the opportunity to welcome your first customer through your doors.
Negotiating the “Time to Open” Clause in Your Franchise Agreement
With this risk in mind, it will make sense to negotiate this “time to open” clause in many cases. While franchisors have a legitimate interest in making sure their new franchisees open for business (and start paying royalties), these clauses often go much further than necessary. They also frequently create exposure for franchisees involving factors that are beyond their control. For example, some of the options for negotiating the “time to open” clause in a franchise agreement may include:
- Extending the deadline to open for business (i.e., from 30 days to 60 days)
- Creating exceptions for factors that are within the franchisor’s control (i.e., if you can’t open for business because your franchisor won’t approve your site selection)
- Creating exceptions for other factors that are beyond your control (i.e., if a major storm or pandemic makes it impossible to open for business by the stipulated deadline)
Of course, what makes sense in any individual case will depend on both the specific language in the franchise agreement and the specific circumstances at hand. If you have plenty of time to open and have full control over when you launch your home-based franchise, then negotiating this clause may be less of a concern. Conversely, if you will be signing a lease, purchasing equipment, and taking other expensive steps that involve third parties, then it will be important to make sure that you have reasonable protections in place.
Preparing to Make Sure You Can Open Your Franchise On Time
Even if you negotiate reasonable protections into your franchise agreement, it will still be important to make sure that you are confident in your ability to open on time before you sign. As a new franchisee, the last thing you want is to end up in a dispute with your franchisor over whether the “time to open” clause in your franchise agreement justifies termination.
What can you do to make sure you are ready to open your franchise on time? Here are some tips to consider:
- Make Sure You Have Your Financing in Order – If you will be financing any aspect of your franchise (or your entire franchise), you will want to make sure you have your financing in order. Complete your pro forma, fill out your business plan and get pre-qualified so that you know you will have access to the funding you need when you need it.
- Address Site Selection, Vendor Selection and Other Similar Issues Before Signing – If you can get your site approved (or at least conditionally approved) before you sign, if you can line up your vendors, and if you can take other steps that are all necessary in order to open before signing your franchise agreement, you can eliminate much of the uncertainty that would otherwise put you at risk for default. Negotiating leases and establishing other relationships takes time, and much of the timing is beyond your control. At the same time, you need to avoid entering into binding contracts until you are confident that your franchise purchase will move forward.
- Make Sure You Know What is Required In Order to Open for Business – What do you need to do before your franchisor will approve you to open for business? Before you sign your franchise agreement (and before the clock starts ticking), you should make sure you know exactly what is required to launch your franchised business.
- Work Backward from Your Opening Deadline to Create a Plan – Let’s say you will have 30 days to open once you sign your franchise agreement. What do you need to do each of these 30 days to make sure you can open on time? By working backward from your opening deadline to create a plan, you can give yourself a roadmap to follow and avoid putting your franchise at risk.
- Talk to Other Franchisees – Did other franchisees negotiate the “time to open” clauses in their franchise agreements? How long did it take them to open for business, and what hurdles did they encounter along the way? Franchisees will often be more than happy to share their experiences, and the insights you can gain from these experiences can be invaluable.
Different circumstances may call for different steps as well. Ultimately, as a franchisee (or prospective franchisee), it is up to you to ensure that you are adequately protecting your legal and financial interests. If you become a “problem franchisee” early on, your franchisor may be only too happy to deposit your initial franchise fee and then find a replacement for your territory. Conversely, if you take the necessary steps to protect yourself, you can start out on solid footing, and you can put yourself in the best position possible to achieve long-term success.
Discuss Your Franchise Opportunity with National Franchise Attorney Jeffrey M. Goldstein
If you are thinking about buying a franchise and have questions about what you can (and should) be doing to protect yourself during the process, we invite you to get in touch. To discuss your franchise opportunity with national franchise attorney Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free consultation online today.
