The Perilous Franchise Agreement: What Did You Sign?

Purchasing a franchise has become one of the most popular avenues for individuals looking to escape the rigid work day of a 9 to 5 job and take the leap into the world of independent business owner. After all, who doesn't dream of being their own boss and controlling the limits of their own financial future? For anyone looking to act on their entrepreneurial spirit, franchising can indeed offer many attractive qualities that can provide excellent growth and earning potential, as well as satisfy that longing for independence. On the other hand, individuals that jump into franchising too quickly without adequate planning can find themselves mired in financial and legal problems. Even the most sophisticated businessperson can fall into this trap and be left scrambling to understand exactly what they signed.

Purchasing a franchise requires not only a substantial investment of time and money, but requires careful planning and investigation. You should thoroughly review all disclosure documents provided to you and take the time to interview both current and former franchisees of the franchise system. These simple but important steps will often spur many new questions for you to ask the franchisor and assist you in making an educated decision about which franchise is right for you. In particular, you should inquire about the types and amounts of initial and ongoing training, marketing and advertising support the franchisor provides. Indeed, your monthly royalty payments should go to more than just the licensing rights of the franchisor's name. Those hefty payments should also be subsidizing the franchisor's ongoing support and assistance, as well as brand improvement to help you develop and maintain a prosperous business.

Part of your careful planning and investigation should also include a detailed review of any document the franchisor asks you to sign. Every franchise document has been prepared by an experienced team of lawyers and you should consider arming yourself with the same professional advice and counsel before you sign on the dotted line. You should take the time to review and understand each term in your franchise agreement. Even the most seemingly benign words such as "sole" or "reasonable" in terms of the franchisor's discretion can mean the difference between salvaging your business and forfeiting your entire investment.

In taking steps to better understand what you are signing, you will be better prepared to negotiate with your franchisor to include more favorable terms in your franchise agreement, or, in some instances, avoid signing an extremely oppressive agreement altogether. While it is typical that your franchisor will negotiate some terms of the proposed franchise agreement, it is highly likely that it will hold fast to many terms as written. Pay particularly close attention to clauses or phrases that appear one-sided. In other words, if the franchisor is permitted to do something make sure you too are afforded the same contractual rights. Other important clauses and terms may include any or all of the following.

Restrictive Covenants

Beware of restrictive covenants that may prevent you from carrying on your livelihood both during your franchise term and for a period of years after your franchise expires or otherwise terminates. These terms are typically referred to as covenants not to compete. These clauses can cut both ways, and often do. For instance, if a franchisee is located next to you and he/she agreed to a restrictive covenant, they would not be able to operate for a certain time period or within a certain radius of their store or other franchised stores after termination or expiration of their franchise. On the other hand, should you be terminated or not renew your franchise agreement, you also could be prohibited from operating a similar business for a period of time in a specified area.

Exclusive Territories

It is extremely important that you be afforded an exclusive territory in which to operate your franchise. If you do not include this in your agreement your bottom line may suffer substantially from encroaching franchisees, corporate competitors, or both. Also, if your business entails sales, make sure you franchisor is not permitted to unreasonably compete with you through internet sales. Internet competition may serve to be just as devastating to your business as if another store opened next door.

Cross-Default Provisions

Oftentimes franchisors will include cross-default provisions in your franchise agreement. This means that a default under one agreement can be construed as a default under all agreements that you have with the franchisor. This is particularly troubling if you own multiple franchised units which would permit your franchisor to terminate not one, but all of your stores, regardless of how profitable one may be over the other.

Lease Takeover Clauses

Franchisors often require that in the event your franchise agreement is terminated, that it be entitled to come in and operate your store and take over your lease. This is extremely important for franchisees who may wish to exit the system and operate a completely separate business out of the leased space. By agreeing to this term, you may effectively give up any rights you have to a prime location.

Renewal Rights

You should be afforded the opportunity to renew your agreement or have the right to sell it for value. You do not want to learn after ten or more years of hard work that you simply have "rented" a business and have no way to profit from the development of your good will and your substantial investment of time, money and effort.

Dispute Resolution/Venue Selection

While no one wants to plan for or even think of ending up in litigation with their franchisor, a smart businessperson will always plan for the worst case scenario. Beware of clauses that require you to litigate in a specific forum. If you are located in Virginia and your franchise agreement requires that all disputes be decided through arbitration in Arizona, keep in mind that costs in having to defend or bring claims against your franchisor will be significantly increased. In addition, try to avoid waiving your right to a jury ? in most instances, juries will be much more receptive to a franchisee's plight than a law-bound judge.

By informing yourself upfront about the potential dangers that may lie ahead, you will be better equipped to deal with the challenges faced by many into today's ever-growing and ever-changing world of franchises. In the long run, a small investment of time and money up front to understand exactly what you are signing will better prepare you for the future of your franchise. Most importantly, it will likely better equip you to maintain an extensive and prosperous relationship with your franchisor for years to come.

Bradley J. Hansen, Esq., is an attorney in the Northern Virginia law firm of Hughes & Associates, P.L.L.C. Mr. Hansen's practice focuses on franchise, construction and complex civil litigation.

Brad is admitted to the Bars of the Commonwealth of Virginia and D.C. Prior to joining Hughes & Associates Brad practiced with a national litigation boutique law firm located in Washington, D.C. where his primary focus was on complex commercial litigation and franchise and distribution law. Brad has represented franchisees in state and federal courts throughout the country with regard to issues of encroachment, specific performance, fraud, monetary defaults, quality assurance defaults, wrongful terminations, franchise transfers and compliance with state and federal franchise laws.

Brad can be reached at brad@hughesnassociates.com or by calling him at 703-671-8200.

This article is not intended to provide legal advice, but to raise issues bearing on legal matters.

spotless home service Deerfield ..
In The News:

Google, Dior, Allianz and dozens of other companies lost sensitive customer data in Salesforce-related breaches affecting millions of records across multiple sectors.
Apple launches iOS 26 with new Preview app that combines document editing, PDF annotation and scanning features into one streamlined iPhone experience.
New AI road monitoring system uses sensor-embedded fabric to predict infrastructure problems, potentially reducing maintenance costs and traffic disruptions for cities.
Holiday charity scams target retirees through lookalike organization names, untraceable payment requests, and data broker information to steal donations.
The Federal Trade Commission says criminals are posing as IRS agents, law enforcement officers or other officials, often over the phone or online, to steal thousands of dollars at a time.
AI phishing scams now use voice cloning and deepfake technology to trick victims, but Kurt "CyberGuy" Knutsson reveals warning signs to watch for.
Inversion Space unveils Arc, a reusable reentry vehicle that can deliver up to 500 pounds of cargo from orbit to anywhere on Earth in under an hour.
Red flags like processing fees, urgent countdowns and requests for full Social Security numbers expose fraudulent settlement sites targeting consumers.
Comprehensive analysis of Google Maps, Waze and Apple Maps examines usability, routing accuracy, data handling and features across the top navigation platforms.
Expert analysis reveals whether wired Ethernet or wireless Wi-Fi connections are safer for home internet use, plus practical steps to secure your network from attackers.
Australian construction robot Charlotte uses sand, crushed brick and recycled glass to 3D print fireproof, floodproof homes with reduced carbon footprint.
Cybercriminals are using fake invitation emails to trick recipients into downloading malware and stealing personal information and data.
Flying drones could help retailers fight a 93% increase in theft rates as Flock Safety promotes airborne security systems to track suspects and deter crime.
The Fox News Artificial Intelligence Newsletter brings you the latest news on the emerging technology every Saturday, highlighting top stories.
Hacker group Radiant stole data from 8,000 children at Kido nursery chain, demanding ransom and directly contacting parents with intimidation tactics.
As 18 states implement bell-to-bell cell phone bans, creative students use Google Docs, iMessage on MacBooks and Post-It notes to stay connected in class.
A sheriff's captain says deputies often spend hours writing reports between calls, but Axon's AI program, Draft One, helps them save crucial time in the field.
Sora 2, OpenAI's new video-generation app, can create AI-generated videos based on a singular prompt. The results are both mind-blowing and terrifying.
iPhone and Android users can reduce Wi-Fi calling battery drainage through settings adjustments, background app limits and stronger Wi-Fi connections.
Work email scams are becoming harder to detect as criminals use AI and spoofed addresses to trick employees into opening malicious attachments and links.
From her Arizona living room, Christina Chapman ran a covert hub that helped North Korean operatives infiltrate U.S. firms, netting $17 million in stolen salaries.
UC Santa Barbara researchers developed a soft robotic intubation system that achieved 100% success rates for experts and 96% for paramedics with minimal training.
Scammers exploit probate filings to target grieving families with fake fees and debts, Kurt "Cyberguy" Knutsson reports.
Automotive giant Stellantis becomes latest victim of widespread Salesforce breaches affecting companies like Google, Cisco and Adidas this year.
A woman from Washington reunited with her missing Maine Coon cat Louie after 11 days using Love Lost, a free AI-powered pet recovery platform.

What Your Small Business Can Learn From The Doctor

Most doctors never distinguish the difference between customers and patients.... Read More

How to Get Started As A Government Contractor

Becoming a contractor or sub-contractor for the U.S. government can... Read More

10 Best Practices to Consider as Your SBIR Negotations Approach Contract Signature

10 Best Practices to consider as your SBIR negotiations approach... Read More

How to Start a Pet Transportation Business

Pet Transportation Services are needed as the number of pets... Read More

Is Brick and Mortar A Passing Fad?

Q: Is the online world the best place to sell... Read More

Franchises Offer Shortcuts, But Not Control

Q: I will be retiring this year at age 60... Read More

ADH Will Make Your Life More Productive & Your Life More Profitable

What is a Virtual Assistant?? A Virtual Assistant is that... Read More

Grants vs. Contracts

Commonly folks have asked me what the technical difference is... Read More

Small Business Newsletter Dilemma: Which Day Do I Send?

If you're just ramping up your small business email newsletter,... Read More

Mobile Truck Washing, Case Study

Most folks in the pressure washing business are happier to... Read More

Business Checks are an Added Cost to Your Small Business - Try Making Them Yourself!

Starting and managing a small business is no fun chore,... Read More

Environmental Pressure Washing in Pennsylvania

If you run a mobile car wash, mobile fleet washing... Read More

Marketing Your Small Business - The Top 10 Brilliant Ideas

A Brilliant Marketing Idea... sounds great but what is it?... Read More

11 Things Small Business Owners Can Learn From The Miracle On Ice

1. Know Where You're Going ? Coach Herb Brooks had... Read More

Five Break-through Ideas to Immediately Increase Profits and Improve Cash Flow

Too often in business we get trapped into reviewing our... Read More

Make Your Business More Profitable

More sales and more profit. Isn't that what you want... Read More

5 Good Reasons a Self-Employed Professional Should Take Vacation

So you think you're not justified in taking time away... Read More

FTC Franchise Rule if Enacted will Trigger Hardship for Private Sector

The FTC Franchise Rule maybe changed, as the Federal trade... Read More

SBIR - A Nice Add-on Business

If you are a small business and qualify to participate... Read More

Private Franchising is not Real a Real Franchise

One major issue not being addressed right now in the... Read More

Yeah, It IS Lonely At the Top

Sometimes when you run a business you feel as lonely... Read More

Pressure Washing Aircraft Hangers at the Airport

If you are looking for a way to own your... Read More

Four Reasons Why Small Businesses Succeed (or Fail)

The American system of business management has been admired and... Read More

Why Does a Business Fail and What Can You Do to Stop It?

I believe the number one reason why a business will... Read More

FTC Report on Franchise Rule Making; What Purpose?

The Federal Trade Commission out of the blue decide in... Read More

spotless home service Buffalo Grove ..