Franchise and Business Opportunities

Nine of the Most Important Provisions to Look for in a Franchise Agreement J. Michael Dady, Attorney Dady & Garner, PA One of the most important things that you can do to protect yourself, when you are planning to invest the time, money and energy that come hand and hand with owning and operating a franchise, is to carefully review your franchise agreement before signing. There are, of course, many provisions that will impact your ability to successfully operate your franchise, and many others that will impact the kind of protection you will have in the event of a dispute with your franchisor. But, in my 29 years of experience as a lawyer for franchisees, I have found that there are nine particularly important provisions to look for. 1. A Good Definition of What You Will be Selling First, make sure that the agreement contains a good definition of what it is you will be selling. You want assurances that you will be able to handle the entire array of products and services offered by the franchisor, as well as all new and improved variations thereof. 2. Protection Against Same-Brand Competition You should also make sure that the agreement provides protection against same-brand competition. If you are going to be investing your life’s savings and making this franchise your life’s work, in building a demand for the products or services in your area, you should make sure that you will be able to reap the benefits of those efforts without having to compete with others selling the same brand of products or services in your area. 3. “Do the Job, Keep the Line” Duration If you do a good job building demand for products or services in your trade area, then you should be able to continue to be the only representative of that product line or service in your trade area so long as you capably perform; and, if the franchisor should ever believe that you are not capably performing, then you should be entitled to be given notice of perceived deficiencies and a reasonable opportunity to address them. In short, a franchisor should not be able to terminate you as long as you capably perform. 4. An “Early Out” Provision Most form franchise agreements do not contain an “early out” provision for franchisees. We have found that this right is something that, increasingly, is an interest to our franchisee clients as they face dramatic changes in their franchisor/franchisee relationships, with no way to get out of relationships which, although starting well, have turned very bad. In those situations, our clients are surprised to learn that, even though their franchise may be losing money, the franchisor will look to them to honor the commitment in the franchise agreement to pay royalties for the duration of the relationship. 5. Franchisor and Franchisee Obligations The franchisor’s specified obligations should include, at the very least, an obligation to provide some support to you as the franchisee. If fees are charged, you should be receiving written assurance that you can expect to receive fair value for the fees paid. Likewise, you should expect a clear recitation in the agreement of your obligations as the franchisee. Additionally, if the franchisor reserves the right to make changes in the future in your performance obligations under the franchise agreement, those changes should be subject to a “reasonableness” covenant (and, ideally, should first be run through a franchisee board of advisors to confirm reasonableness before implementation). 6. Fair Compensation and Ability to Sell Related Products The franchise agreement will spell out your financial obligations. You should make sure that these obligations will allow you to make a good living if you work hard and do a good job, disallowing the franchisor from terminating you or failing to renew your agreement unless they have good cause to do so and you have been afforded reasonable notice and an opportunity to cure any alleged deficiency in performance. Additionally, if your franchise agreement does not bind you to selling the products and services of the franchisor exclusively, you will want to make sure that you have the ability to sell complimentary products and services. 7. Fair Dispute Resolution Procedures If a dispute should arise between you and the franchisor, swift and even-handed dispute resolution procedures are preferable. Franchise agreements that provide for arbitration are acceptable, provided that the arbitration is in an acceptable venue. Similarly, if the agreement contains a provision for payment of attorneys’ fees, this is acceptable, but only if it means that the prevailing party (and not just the franchisor) gets attorneys’ fees. You should also be wary of provisions that disclaim otherwise available statutory protection, or unduly limit your right to recover damages from the franchisor if it breaches its duties. 8. Right to Sell or Transfer/Right to Do Something Else You should be able to sell or transfer the business without undue interference on the part of the franchisor. This includes insuring that, if you sell your business, you reserve the right to continue to make a living in that area, subject only to fair covenants against competition that the buyers of your business might reasonably require. Rights of first refusal by the franchisor are not preferred as they tend to depress values. Conversely, in this time of mergers among competitors, and leveraged buyouts, you should be wary of provisions that give the franchisor an unfettered right to assign its side of the contract. 9. Good Faith and Fair Dealing Finally, look to get a written commitment from the franchisor that states what business people intuitively know, as follows: “The parties to this relationship agree to deal with each other honestly, fairly, in good faith, and in a non-discriminatory, commercially reasonable manner.” Who can be against that? While it is the rare prospective franchisee, indeed, who can get all nine of these basis protections, well qualified prospective franchisees, working with capable franchisee counsel, can and do get many of these basic protections negotiated into their franchise agreements, even after being initially presented with unfavorable forms of franchise agreements at the initial sales presentation. Given the significance of the wording of the final franchise agreement to the future financial fortunes of franchisees, no prospective franchisee should sign a franchise agreement without first having it evaluated by experienced franchisee counsel, who would then likely work with the prospective franchisee to try and improve it by getting as many of these nine important provisions incorporated into the franchise agreement as possible. Michael Dady is the founding partner of Dady & Garner, P.A. of Minneapolis, Minnesota and New York, New York. To learn more about Dady & Garner, P.A. or to reach Michael, click here. To see all Forum articles regarding franchise law, click here.