Reviewing Your Franchise Agreement

So, you’re looking at a once-in-a-lifetime opportunity through franchising. Investing in a franchise can be profitable to prospective buyers and comes with other benefits, such as being your boss and operating a business under the name of a trusted brand. Even so, you’ll need an attorney to review the franchise agreement to protect your interests.

Most people forget to review the finer details of their franchise contracts, which may hurt their interests in the long run. Also, evaluating the terms of a contract can be challenging if you are not experienced, and that’s why prospective buyers should consider hiring an attorney to review the franchise agreement to avoid exploitation and future disputes.

Consulting a Franchise Attorney

The standard advice is to involve a franchise attorney before signing the franchise agreement. A franchise lawyer can help in various ways, including:

• Reviewing the franchise contract document for inconsistencies;
• Reviewing the franchise contract for onerous clauses and non-compliance with the Franchising Law;
• Reviewing a franchise agreement for unfair and one-sided clauses that typically favor the franchisor;
•  Helping the franchisor draft an agreement that’s compatible with the provisions of the Franchising law.

Other things to look out for can include:

1.  Terms of the Agreement

Terms of the agreement include:

• The franchise term;
• Duties and obligations of both parties;
• Franchise fee;
• Rights and restrictions of the franchisee;
• Dispute resolution mechanism, and others.

2. Itemization of Expenses

The Disclosure Document should disclose all the expenses a buyer (franchisee) will incur before signing. Itemized expenses help the franchisee prepare a cash flow forecast, a comprehensive budget, and a business plan.

3. Success Rate and Location of Existing Franchise Outlets

The success of a franchise can be evaluated by reviewing the number of existing outlets, location, and turnover rate of the existing outlets – the specifics to look out for can include:

• The turnover rate or transfer rate–a high turnover rate suggests the poor performance of the franchised business;
• Existence of legal disputes against a franchisor;
• The location of other outlets versus performance will give you an idea of the locations to consider.

4. Transferring or Selling Business Interests

The applicable provisions or rules for selling or transferring the business interests are specified under the transfer clause in most Franchise Agreements. Ensure the contract allows you to sell your franchise if you’re no longer interested in the business.

Franchising typically involves a long-term commitment in which the terms of a franchise contract impact success. Consequently, reviewing a franchise agreement should be prioritized before franchisees commit themselves.

Frequently Asked Questions

Do I need an attorney to review my franchise agreement?

You are not legally required to, but it is strongly recommended. A franchise agreement is written by the franchisor’s lawyers to protect the franchisor, and it commits you for years. An independent attorney can spot one-sided terms, explain what you are agreeing to, and identify risks before you sign.

When should I have my franchise agreement reviewed?

Before you sign anything or pay any money. Federal law gives you at least 14 days with the franchise disclosure document, which includes the agreement, so use that window to have it reviewed. Waiting until after you sign leaves you with far fewer options.

How much does it cost to have an attorney review a franchise agreement?

Fees vary with the complexity of the agreement and whether the attorney charges a flat fee or by the hour. A review commonly ranges from a few hundred dollars for a basic look at the agreement to a few thousand dollars for a full review of the agreement together with the franchise disclosure document it comes with. Set against a franchise investment that often reaches six figures, that is a small cost. We offer a free initial consultation to talk through the scope of your review.

What does an attorney look for when reviewing a franchise agreement?

Among other things, the fees you will owe, the size and protection of your territory, renewal and transfer rights, the grounds on which the franchisor can terminate, any non-compete that applies after you leave, and how disputes must be resolved. The goal is to find the terms that carry the most risk before they become binding.

Can a franchise agreement be negotiated?

Sometimes. Franchisors often present a standard form and keep core terms consistent across the system, but some provisions can be adjusted, and experienced or multi-unit buyers frequently secure changes. An attorney can tell you which terms a particular franchisor is likely to move on.

What happens if I sign a franchise agreement without legal review?

You are bound by whatever the document says, including any unfavorable or one-sided terms you did not notice. Problems often surface later around fees, territory, or termination, and by then your options are limited. A review before signing is far less costly than a dispute afterward.