Five Things to Check Before You Sign a Franchise Agreement

CORP - Nov 1.pngWhether your new franchise business involves ice cream or cleaning services, business ownership in an established business network can be very appealing. As a franchisee you’ll probably be provided training in a proven business system, and be given access to established brands. Starting out as a franchisee is an exciting time, and it’s common to focus on the mechanics of getting the business started, and projected revenues, rather than on problems which might arise later. But what if it doesn’t work out?

Franchisors selling franchises in Texas are subject to written disclosure requirements. Disclosures required under Texas and federal law include a wealth of valuable information, such as training promised by the franchisor, litigation in which the franchisor has been involved, and the franchisor’s financial statements. Be sure to check for these potential issues in your agreement:

  1. Read the franchise agreement carefully before signing, and make sure you
    understand agreement language. The franchisor should be ready and eager to explain the terms of the agreement. Any suggestion that language is just “the usual boilerplate” could be cause for concern. Pay attention to details on renewal, extending the term of your franchise, or if the franchisor has the right to change your agreement.
  2. Confirm that your franchise will have territorial protection. You don’t want to invest time, effort and money in your new business, only to find that the franchisor has the right to sell an identical franchise to someone else next door..
  3. Give some thought to what happens if you should suffer a physical or mental disability. May your spouse, business partner, or other trusted person continue to operate the franchise, or is continuation of the franchise threatened? Check to see what qualifies as a “disability” in the agreement.
  4. Examine the franchise agreement to see what right you have to terminate the agreement if you should be dissatisfied. How is termination handled? Equally important, check to see what right the franchisor has to terminate you. Can the franchisor terminate you only for specific reasons (e.g. dishonesty, fraud), or can the franchisor terminate you for more general reasons, such as “failure to meet franchisor’s expectations?”
  5. If you and the franchisor have a disagreement and are unable to resolve your differences, how is the matter resolved? Is mediation mandatory? Can you have your complaint heard and resolved by a jury of your peers, or must your complaint be heard in a private arbitration proceeding or in a certain geographic area.

Buying a franchise is an exciting but complex time. The matters above are just a few of the many things to consider before you sign an agreement.

This article was written by Rick Yeomans. For more information regarding this post, he can be reached at ryeomans@gdhm.com

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