Buying and owning a franchise are unique experiences that require diligence, patience, and commitment. If you’re thinking about entering the world of franchising and have a lot of questions, you are not alone.
There are many potential pitfalls when embarking on any new business, so it is important to do your research. This is no less true if you are a prospective franchisee.
The Most Commonly Asked Questions By a Prospective Franchisee
As a franchise law firm, we receive many questions. Here are answers to the seven we come across most frequently.
Q: What is the “due diligence” process?
In franchising, “due diligence” refers to the process of collecting the information you need to make an informed decision about a potential franchise investment. There are several steps involved in the due diligence process, from visiting the franchisor’s headquarters to speaking with current and former franchisees.
Q: What do I need to know about my franchise agreement?
Just like any other business contract, it’s vitally important that you fully understand all the terms and conditions before you sign.
Along with the franchisor’s operations manual, your franchise agreement will determine what you can (and can’t) expect from your franchisor. It also defines what your obligations are as a franchisee.
The franchise agreement will also contain provisions for what happens if you have a disagreement with your franchisor. Prospective franchisees need to take the time to carefully review their franchise agreements. They should talk to a lawyer to find out if any provisions need to be negotiated.
Q: How much support can I expect to receive from my franchisor?
It depends, but probably not as much as you would expect.
Let’s go back to the franchise agreement. What does the agreement say about the franchisor’s ongoing obligations? Probably not much.
While franchisors exert significant control over their franchisees, they typically seek to limit their own obligations as much as possible.
Q: Will I receive an exclusive territory?
That depends on the terms of the franchise agreement. Some franchisors offer exclusive territories. Some offer “protected” territories. In some systems, franchisees do not receive any territorial protection whatsoever.
Q: What happens if my franchise is unsuccessful?
If you struggle to succeed as a franchisee and reach the point where you are thinking about closing the business, you must carefully weigh your options.
In many cases, franchisors can claim “lost future royalties” from franchisees whose businesses fail. In addition, you will likely be subject to restrictive non-competition and non-solicitation covenants after your franchise relationship ends.
Q: What happens if my franchise is successful and I want to renew at the end of the initial term?
Most franchise agreements include renewal provisions that allow successful franchisees to continue beyond their initial term.
However, franchisors can still exert significant control over the renewal process. This can include forcing franchisees to adopt new system standards and sign a new (and different) franchise agreement. There are usually tight time windows for exercising renewal rights as well.
Franchisees who intend to renew must typically start the process well in advance.
Q: What are some of the most common issues franchisees have with their franchisors?
Franchisor-franchisee disputes are common. Some franchise systems are known for having persistent issues with franchisee satisfaction.
From royalty and advertising fee calculations to costly updates and mandatory purchasing requirements, virtually all aspects of the franchise model have at least some potential to lead to arbitration or litigation.
Caveat Emptor
If you stop to think about it, no one ever signs a franchise agreement thinking it will lead to expensive and aggravating legal hassles. Nonetheless, franchise agreements have the power to make your life miserable, so it makes sense to exercise an appropriate level of caution prior to signing.
