Franchise Legal Pitfalls
Introduction
Buying a franchise is an exciting step toward business ownership, but signing a franchise agreement without careful review can lead to unexpected challenges. Many new franchisees make legal mistakes that can impact their financial future and operational freedom. Here’s what to watch out for before signing on the dotted line.
1. Not Understanding the Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is a legal document that outlines key details about the franchise, including fees, financial performance, obligations, and litigation history. Failing to review this document thoroughly—or not having an attorney review it—can lead to surprises down the road.
What to Do:
Take your time to read and understand the FDD.
Consult a franchise attorney to explain the details.
Pay close attention to the franchisor’s financials and litigation history.
2. Overlooking Hidden Fees and Costs
Many franchisees focus on the initial franchise fee but fail to account for ongoing costs such as royalties, marketing fees, technology fees, and required vendor purchases. These costs can eat into profitability and should be evaluated carefully.
What to Do:
Identify all recurring expenses in the FDD.
Ask existing franchisees about unexpected costs.
Ensure the financial model aligns with your investment capabilities.
3. Signing Without Negotiation
Many franchisees assume that franchise agreements are non-negotiable, but in some cases, franchisors may allow adjustments to territory protections, fees, and operational flexibility.
What to Do:
Work with a franchise consultant or attorney to identify negotiable terms.
Request modifications if certain terms seem too restrictive.
Be prepared to walk away if the agreement is unfavorable.
4. Misunderstanding Territory Rights
Some franchisees believe they have exclusive rights to a geographic area, only to find out later that the franchisor can place another location nearby. This can lead to market saturation and reduced profitability.
What to Do:
Verify the territory clause in the franchise agreement.
Request clarity on whether nearby locations can be added.
Ensure your territory is protected from encroachment.
5. Not Having an Exit Strategy
Many franchisees don’t think about how to exit the business until they want to sell. Some franchise agreements include strict resale terms, heavy penalties, or non-compete clauses that make leaving difficult.
What to Do:
Understand resale restrictions before signing.
Check for non-compete clauses that could impact future business opportunities.
Discuss exit options with a franchise attorney.
6. Assuming Franchisor Support Is Guaranteed
While franchisors typically offer training, marketing, and operational support, not all systems are as robust as advertised. Some franchisees find themselves with limited resources after signing the contract.
What to Do:
Speak with current franchisees to gauge the level of franchisor support.
Review the franchisor’s obligations in the FDD.
Ensure support services align with your business needs.
Conclusion
A franchise agreement is a legally binding contract that requires careful review and consideration. Avoiding these legal pitfalls can save you from costly mistakes and ensure a smoother franchise experience.
Need guidance before signing a franchise agreement? Contact us today to review your options and protect your investment.
