National franchise attorney Jeff Goldstein discusses seven important legal considerations for full-time employees considering a move to franchise ownership.
Buying a Franchise is a Long-Term Commitment
Unlike the traditional at-will employment relationship, the franchise relationship involves a long-term, binding commitment. Most franchise agreements include an initial term in the range of five to ten years, with few (if any) rights for the franchisee to terminate prematurely. If you are not ready to make that kind of commitment, buying a franchise might not be right for you.
Your Initial Investment is at Risk
Between the initial franchise fee, the costs of setting up your franchised business and the working capital you will need for your first several months of operation, buying a franchise involves a significant up-front investment. As a franchisee, whether you recoup this investment will be almost entirely up to you.
Amount of Support You Receive will be Limited
While the amount of support franchisees receive from their franchisors can vary greatly from one system to the next, generally speaking, you can expect the amount of support you receive to be limited. Franchisors often include virtually no support commitments in their franchise agreements; and, while franchisors have a vested interest in franchisees' success to a certain extent, most will not hesitate to simply replace an underperforming franchisee.
The Financial Tables are Turned
As an employee, you could expect a steady paycheck from your employer. As a franchisee, you have an ongoing obligation to pay your franchisor. Many franchise agreements include minimum royalty payments (as opposed to royalties based solely on a percentage of gross sales), and you could even be forced to pay "lost future royalties" if your franchise is unsuccessful.
Nothing You Create is Yours
This is one way in which being a franchise owner is similar to being an employee. Your brand, your website, your social media accounts, your customer list, any innovations you develop as a franchisee - these are all things that will almost certainly belong to your franchisor under the terms of your franchise agreement.
Your Renewal "Rights" are Limited
A franchise is a long-term commitment, until it isn't. When your initial term expires, it will largely be up to your franchisor whether you will have the opportunity to renew. While franchise agreements include renewal "rights" for the franchisee, the right to renew is typically subject to numerous conditions, including meeting the franchisor's then-current standards, remedying any outstanding deficiencies and signing the franchisor's then-current franchise agreement.
Post-Termination Restrictions are Common
Whether your franchise agreement expires or your franchisor terminates the agreement for cause, you can expect to be subject to various post-termination restrictions. The most common forms of post-termination restrictions are: (i) confidentiality obligations, (ii) non-solicitation covenants and (iii) non-competition covenants. Together, these restrictions mean that you will likely be prohibited from using much of the information you learned as a franchisee, unable to contact your franchise's clients or customers, and prohibited from operating a similar business in your geographic region for an extended period of time.
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