Understanding Your Franchise Agreement is our three-part series covering 15 key provisions of the franchise agreement for prospective franchisees. As a franchisee law firm, we have represented clients considering all types of franchises, and we have reviewed franchise agreements from franchisors in every segment of the industry. Parts 1 and 2 of the series covered opening, territory rights, term and renewal, fees, and operating standards. Here in Part 3, we cover transfer, termination, post-termination, dispute resolution and “miscellaneous” terms.
11. Transfer
Similar to renewal, franchisees’ transfer rights are typically subject to several conditions. Franchisors will usually reserve the right to approve transferees, require payment of a transfer fee, and require franchisees to come current on any outstanding obligations. Some franchisors will also reserve a right of first refusal.
12. Termination
Franchise agreements almost always include broad termination rights for the franchisor and few, if any, termination rights for the franchisee. A typical franchise agreement will list several “defaults” that are grounds for termination, some of which will be subject to cure and some of which will not. As a franchisee, it is imperative to know what constitutes grounds for termination of your franchise. Most franchisors tend to be unforgiving, and they will not hesitate to remove an underperforming or “problem” franchisee.
13. Post-Termination Obligations
If your franchisor terminates your franchise, you will likely be subject to several post-termination obligations. Some examples of post-termination obligations that are common in franchising include:
- An obligation to cease use of the franchise system
- An obligation to return all branded materials
- Non-competition and non-solicitation covenants
- Confidentiality obligations
- An obligation to pay “lost future royalties”
While you might not be concerned about losing your franchise right now, it is important not to ignore the risks of termination. You should consider these provisions carefully and decide whether you think any negotiations are necessary.
14. Dispute Resolution
Similarly, while it might seem unlikely that you will get into a legal dispute with your franchisor, you still need to carefully consider the dispute resolution provisions in your franchise agreement. This includes provisions regarding:
- Mandatory mediation and arbitration
- Liability for attorneys’ fees and expenses
- Disputes that are exempt from mediation and arbitration (which typically involve the franchisor suing the franchisee)
- Jurisdiction and venue (which typically require you to travel to the city where the franchisor’s headquarters are located)
While most franchisors will say that these provisions are “non-negotiable,” you still need to know what to expect. You may also want to review Item 3 of the Franchise Disclosure Document (FDD) to see if the franchisor has a history of getting into legal disputes with its franchisees.
15. “Miscellaneous” Provisions
Finally, most franchise agreements include a collection of “Miscellaneous” provisions. Despite the label, these provisions are often extremely important. When you engage a lawyer to review your franchise agreement, the lawyer will review these provisions in detail and advise you of any risks of which you need to be aware.
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Are you thinking about buying a franchise? If so, we encourage you to inquire about our fixed-fee franchise business review programs. To discuss your franchise opportunity in confidence, call 202-293-3947 or request a free consultation online today.
