A franchise contract is a long-term arrangement that sets forth the rights and obligations of franchisee and franchisor in the operation of a franchised business. A prospect need not pay great attention to its terms until proper due diligence investigating an opportunity has been done.At a minimum, this includes studying the Franchise Disclosure Document (FDD) which (hopefully) contains helpful financial performance information, speaking at length with existing and former franchisees and discussing all aspects of the deal with trusted advisors.  After that, assuming the prospect wants to proceed with the deal, the next step is to study carefully the offer contained in the franchise agreement with guidance from knowledgeable franchise counsel.

The Franchise Sales Process

Prospects should evaluate franchise offers prudently and wisely. They should not rush to buy or succumb to high pressure sales tactics (which accompany some but not all offers).  In the franchise sales process, sellers may emphasize success stories (or the potential for success) while steering clear of negatives (which accompany most franchise offerings). Frequently, they downplay the significance of the so-called “standard” franchise contract.  This does a disservice to the prospect. They may tell prospects to put their trust in the franchisor who will be with them “every step of the way, because if you [the franchisee] don’t make money we [the franchisor] don’t make money”.  As a result, many prospects believe that all franchise contracts are basically the same (“standard”) and that they are non-negotiable. Both statements are not necessarily true.  Indeed, the contract is crucially important in the franchise relationship. Courts pay great attention to them in franchise disputes. Prospective franchisees should do the same.

Why?

Because if the parties find themselves in a serious dispute (which is not improbable), nothing is more important in the relationship than legal RIGHTS. 

If a franchisee is not lucky enough to benefit from a state franchise relationship law or franchise registration law (passed in only a small minority of states), s/he must look to the contract to determine the parties’ rights and obligations. And if the franchisee has not negotiated rights to make the contract fairer, the likelihood is that it will be very difficult to prevail in a franchise dispute.  Some important areas of concern are discussed below.

Not all franchises are created equal

The two main benefits one looks for in a franchise are a well-known name (brand) and valuable know-how in operating the franchised business. Of the thousands of franchise opportunities in the marketplace, however, few have well-known names; the type that immediately attracts customers once the business first opens. 

What is more, many franchisors are not adequately capitalized; in some cases less so than prospects to whom their franchises are offered for sale. And yet, typically their lawyers prepare “standard”, long, onerous contracts giving them extensive (sometimes unnecessary) rights and saddling the franchisees with extensive obligations, as if these franchisors were industry giants.