It could be the opportunity of a lifetime. You’ve done your own due diligence and you’ve decided that becoming a franchisee just makes sense. You’re a fan of the franchise and you believe in the product you will be providing – after your own assessment, the numbers check out, too. The discussions you’ve had with the franchisor have now escalated to action. What happens next?
The franchisor is going to provide you with hundreds of pages to review in the form of a Franchise Document Disclosure (FDD). This FDD is a required disclosure that will contain 23 key items about the franchise, including the franchise background, required fees and royalty rates for franchising, information about the company’s executives, and so on.
Of course, all of this information is important (hence, the fact that it is a required disclosure), but more relevant to this discussion are some key contract terms in FDD and the franchise agreement that will likely be an attachment to the FDD. This is where an attorney becomes important.
Many initial franchisees are under the impression that franchise contracts are non-negotiable. After all, the franchisor has all of the leverage and power, correct? Not entirely. From a business standpoint, franchisees provide a lot of value to a franchisor. As a result, many franchisor’s are willing to work with potential franchisees to get the deal through. An attorney will help you to identify the areas of the FDD and franchise agreement where a franchisor may be willing to negotiate.
Once your lawyer reviews the FDD, she will undoubtedly have changes to suggest. It is likely that many of your attorney’s comments will focus on the vague or ambiguous language that could cause problems down the road. What is “reasonable” cause? What is “timely” notice? Your attorney will recognize areas that are likely to give rise to future disputes, and she will assist you in making sure clarifications find their way into the contract terms. Moreover, your franchise attorney will be able to identify excessive limitations on your legal rights, such as when and how your can seek legal recourse against your franchisor, and what types of recourse you are able to seek, and she will stand in your corner to ensure that your contract is fair, if not favorable.
Additional franchisees equals additional revenue for your franchisor, however, it may not be good news for your location. As a franchisee, you may suffer from a decrease in customers every time another franchise location opens nearby. While this may be addressed in an FDD, such as by recognizing that franchise policy is for a franchisor to keep distance between franchise locations, policies are subject to change. Ideally, you will negotiate for a contractual guarantee that your territory will be exclusive to you only. If not for outright geographic exclusivity, you may be able to compromise for exclusivity in your area on condition that you maintain a certain performance level at your location, or you may be able to negotiate for a right of first refusal if the franchisor does decide to open a nearby store.
Your FDD and franchise agreement will address all of the reasons why a franchisor may terminate their contract with you. Typically, these reasons will include failure to pay royalties, failure to comply with franchise rules, excessive customer complaints, and poor sales. Vague and unclear language (as discussed above) gives your franchisor a lot of leeway to determine when termination is appropriate. We’ve seen franchisees get blindsided by getting shutdown by the franchisor due to one or more of these points, a major one being lower sales. Work with your attorney to set out clear standards and to negotiate for greater leniency from your franchisor.
The Benefit of Trust
Your attorney will not only be able to help with reviewing and negotiating your FDD and franchise agreement, she will also act as your sounding board and advisor. Becoming a franchisee is a big decision, and it doesn’t hurt to have an extra set of eyes to see what you were unable to see. Not only should you seek an attorney who has relevant knowledge and experience to review your FDD and franchise agreement, but who has your best interests in mind, as well.