Franchise agreements for obvious reasons, favor the franchisor. There are many, valid reasons for this. But that does not mean that there is not overreaching. The disclosure rules give you a period of time to review the documents you will sign, ask questions and negotiate. Here are 10 provisions in every franchise agreement that you should try to make sure are fair and even handed:
· Personal Guaranty: If you form a corporation or limited liability company to act as the franchisee, your franchisor is going to want you to personally guarantee the franchise agreement. And if you are married, the franchisor will want your spouse to join in. First, try to avoid having to give the guaranty at all. Second, do not have your spouse sign the guaranty, as that will put your personal assets at risk. Third, try to limit either the duration of the guaranty (first few years) or its extent (limit the financial exposure).
· Trademarks: There is always the possibility that a third party may bring an infringement claim. Make sure the franchisor will stand up for you in that event and hold you harmless for your damages. You will want the franchisor to reimburse you for the costs of rebranding your unit if the franchisor has to change the principal mark.
· Transfer: The transfer (sale, assignment) of your franchise agreement will be subject to the franchisor’s consent and compliance with numerous conditions. Two of these are: 1) the transfer fee; make sure it is reasonable and just compensates the franchisor for its costs in the transfer process; and 2) assumption of your agreement instead of having your buyer/assignee sign a new, current agreement that can have material differences from yours.
· Renewal: Two points: 1) keep your existing agreement; just like a transfer, the franchisor may want you to sign the current version of the agreement that can be materially different; and 2) make sure the renewal fee is not excessive. In a renewal, the franchisor’s costs are not as extensive as with a transfer.
· Modification: The agreement may give the franchisor the right to have you modernize your unit during the term. Make sure that there are sufficient time intervals and that your expense is capped. Also, any modernizations should be system-wide, not just as to you.
· Electronic Funds Transfer: It is common for franchisors to have access to your bank account for payment of royalties, advertising fees and other obligations. Try to eliminate this, to avoid errors that will cost you. If not, only keep a set amount in any account that the franchisor can access.
· Inspections: The franchisor will want the right to inspect without notice and at anytime. You want to limit access to business hours with notice and without disruption to your operations.
· Audit: If your royalty or advertising fees are based on a percentage of sales, the franchisor will want the right to audit your records to confirm that your payments are correct. If a shortage is discovered, you generally have to pay the costs. Make sure the audits are limited as to frequency and that any error that results in you paying costs is more than minimal and is intentional; there should be no “penalty" for an honest mistake.
· Territory: You want an exclusive territory, free from encroachment. Be careful of carve-outs for airports, colleges, hospitals. Be aware of the franchisor reserving the right to use direct mail, catalogs, supermarkets; generally, “alternate channels of distribution". Try to avoid performance minimums that can reduce your territory if you do not ‘hit" them.
· Default: Make sure that the instances where the franchisor can terminate your agreement, without notice, are strictly limited. For those defaults that allow termination with notice, but no chance to cure, they should be ones that are very significant. For those with notice and a chance to cure, make sure the cure period is sufficient and the defaults reasonable.
· Entire Agreement (Bonus): All agreements have a provision that states that the written document is the entire agreement. So, anything that was said during the pre-closing process that is not reduced to writing will be unenforceable. If something was promised that influenced you to become a franchisee, make sure it is part of your agreement.
There are more areas that require your attention. You will be best served by retaining the services of an experienced franchise lawyer to guide you through the evaluation of the agreement and your impending business relationship. You are about to make a substantial investment in time, money and emotion; don’t go it alone.