When you are starting a franchise, the franchise agreement is one of the most important documents you will encounter. It lays out all of the terms of your relationship with your franchisor – terms which will last for years or that can be used to prematurely terminate your franchise.
If you do not scrutinize the franchise agreement, you will be blindly agreeing to a business relationship that dictates nearly every aspect of how you operate your store. It is essential to have a franchise lawyer negotiate, or at least review, the agreement before you sign it.
What Does the Franchise Agreement Cover?
The franchise agreement covers nearly every aspect of the upcoming business relationship between a franchisee and their franchisor. Just a few of the issues that the agreement will cover are:
- Territorial rights
- Marketing and business support provided by the franchisor
- The franchisee's right to renew the agreement
- How the agreement can be terminated early
- Any post-termination non-compete restrictions imposed on the franchisee
- How, or even whether, franchisees can sell or transfer the store to someone else
- Intellectual property rights
- Required operating techniques and mandatory store policies
- Conflict resolution agreements, like an arbitration or mediation clause
These are just a few of the most important provisions that are contained in the franchise agreement, which frequently amounts to up to a hundred pages when all of its addendums are included.
For franchisees presented with the agreement, it can be helpful to think of it as the set of rules that you will have to play by while you operate the store.
What are Some Common Pitfalls?
The franchise agreement is where lots of franchisees make huge mistakes that plague their store and their professional future for years afterwards. Just a few of the most common issues that franchisees get themselves into at this stage in the process are:
- Giving their franchisor the ability to commit franchise encroachment
- Agreeing to onerous day-to-day logistical requirements
- Paying for marketing that helps the franchisor but not the franchisee
- Handcuffing themselves after the end of the franchise agreement by agreeing to overly broad terms of non-competition
- Signing on to a renewal process that gives the franchisor all the leverage at that pivotal juncture in the business
- Agreeing to liquidated damages provisions that far exceed what the franchisor suffered in a breach of the agreement
These issues can drastically alter the quality of the business relationship. The fine print in the franchise agreement can easily turn a lucrative opportunity into a decades-long headache.
Unfortunately, the stage at which the franchise agreement is presented is also when potential franchisees are the most eager to get started. They will have, presumably, read through the franchise disclosure document (FDD) and started to see the glow of opportunity. That optimism frequently clouds the judgment of franchisees and leads to them signing a franchise agreement that all but guarantees that they will never benefit from that opportunity for financial gain.
The Franchise Agreements is Not Always a Take-It-or-Leave-It Deal
Many franchisors present the franchise agreement as a take-it-or-leave-it opportunity. They make it seem like the agreement is a form document that all franchisees sign before starting, without negotiating the terms. In many cases, they subtly pressure franchisees into signing the agreement without legal counsel, without a legitimate negotiation process, or even without enough time for the franchisee to read the full agreement and fully understand its terms.
However, nearly all franchise agreements can, and should, be negotiated with the franchisor.
Especially when franchisors do not have numerous franchisee candidates at their disposal, the terms of the franchise agreement can be negotiated in significant ways that can benefit the franchisee. Franchisees who are willing to take the time and make the effort at this stage can extract concessions from the franchisor that can save them thousands of dollars in the long run by, for example:
- Obtaining important franchisee rights that were not in the contract
- Reduce the scope of alleged violations that trigger the obligation to cure during the renewal process
- Cap the financial concessions that the franchisor can leverage during the renewal process
- Guarantee local marketing efforts by the franchisor
- Extend the franchisee's exclusive territory
These are just a few of the most common concessions that can be gained during the negotiation process.
Massachusetts Franchise Lawyers at the Katz Law Group
The franchise lawyers at the Katz Law Group can review your franchise agreement and help you spot potential problems, and can then negotiate on your behalf to protect your interests and future.
Contact them online or call their law office at (508) 480-8202.