Potholes

SCOTT AUGUSTINE AND SCOTT RATCHICK

Here are the top 10 issues for franchisees to consider when reviewing and negotiating the terms of their franchise agreement.

1. Jurisdiction and consent to venue. If a dispute arises, the franchisor may require you to travel to its hometown jurisdiction for adjudication or arbitration, regardless of how inconvenient it is for you. 

2. Defined terms related to royalties.  Pay careful attention to the defined terms and fees the franchisor can collect from your franchise. These terms can be vague, leaving an opening for the franchisor to charge you additional fees in the future, fees not contemplated when the agreement was executed. Make sure when royalties and other fees are tied to certain revenue sources, those sources are very specifically and, if possible, narrowly defined.

3. Restrictive covenants. Non-competition provisions will limit your ability to engage in activities that compete with the franchisor’s business activities, both while you remain a franchisee and after. Make sure the scope of the franchisor’s brand or concept is as narrowly defined as possible. 

4. Personal guarantees. Does the franchise agreement require a personal guarantee from the franchisee, and if so, for what debts and liabilities? Setting up corporate structure to operate a franchise will not negate your personal liability for such guarantees. Consider how to insulate spouses and marital property from the guarantees.

5. Integration clauses. Get everything in writing, and be leery when the franchisor says “don’t worry about…” Most franchise agreements include provisions stating that only the written terms of the agreement will be binding, and that nothing previously discussed or promised will be enforced.

6. Rights of first refusal. You may have to offer to sell your franchise to the franchisor before you can freely sell it to someone else. This may include terms that make it less appealing to a third-party buyer and thus less valuable for sale. Consider negotiating these terms to be more flexible and beneficial.

7. Expansion opportunities and limitations. You are making a large investment and may have plans to expand your business or the territories in which you operate. Think ahead and plan carefully. 

8. Territorial protections/company stores. Be aware of a franchisor’s plans to establish company-owned operations as opposed to expanded franchisee operations. Company-owned operations might start to infringe on your plans. 

9. Franchisors that operate multiple brands. Such operations may compete with yours if not adequately protected.

10. Term renewals and releases. Franchise agreements have specified durations, and you don’t want to lose your investment at the end of the original term. Consider all that you may have to give up to get that renewal. 

Scott Augustine and Scott Ratchick are shareholders in Chamberlain, Hrdlicka, White, Williams & Aughtry in Atlanta. Reach them at (404) 659-1410 orwww.chamberlainlaw.com.