Here are my ten red flags for franchises:
1. Long Term: Franchise terms should not exceed ten years. I've seen them be as long as 25 years. Who wants to be tied to anything for that long. Franchise agreements are nearly impossible for a franchisee to get out of, so you want to make sure you're not stuck for life.
2. Large Closings: If a large number of franchises have gone out of business within the first three years that's an indication that the franchisor's business model may not be sound.
3. Franchisor is a Chameleon: If the franchisor has been in the same location, with the same leadership team, and has changed names three times in the last decade, that's a red flag. That franchise may be in trouble.
4. Salesman Says LISTEN, DON'T READ: If a salesperson tells you to listen to what he tells you and to ignore the language in the franchise agreement, RUN. The franchise agreement will be enforced, and no one will care what the salesperson told you.
5. Crazy "Cause" Clause: A franchisor can shut down a franchisee's business for "cause." This is one of the most important provisions in the franchise agreement that franchisee's gloss over thinking it never happens. It happens, ALOT! So make sure the franchisor has a good reason if they are going to step in and take your franchise away. And, make sure there is a reasonable cure period, which allows any deficiencies to be fixed before termination occurs.
6. Non-Exclusive Territory: Franchisees assume that any territory granted to them is exclusive. It may not be.
7. Franchisor is Competition: Franchisor's don't compete with franchisees in a perfect world. But, the world is not perfect. Search for any provision in the franchise agreement that allows the franchisor to compete with its franchisees.
8. FDD & Franchise Agreement Don't Match: The law requires the FDD to explain the franchise agreement to potential franchisees in a language they understand. However, this does not always happen. Sometimes, the FDD and the franchise agreement and the FDD do not match, fooling some that rely too heavily on the FDD.
9. Up-Front Fees: Up-front fees are paid regardless of the success of the franchisee. Royalties are only paid when the franchisee's make money. You want the franchisee invested in your business.
10. Pending Litigation: If there is a lot of litigation (or quasi-litigation) between the franchisor and franchisees, or the franchisors and vendors, or franchisors and their employees, have a lawyer pull up those cases to see what is alleged.
Ahaji Amos is patent and trademark attorney with 17 years of experience in intellectual property litigation and prosecution at Ahaji Amos, PLLC, a law firm that represents startup and small businesses in all matters including patent prosecution, trademark prosecution, copyrights, trade secrets, oppositions, cancelations, equity funding and commercial litigation. Ahaji Amos, PLLC is dedicated to representing entrepreneurs, inventors, and innovators.
This article is for information and advertising purposes and does not constitute legal advice. No attorney-client relationship is formed in the absence of a fully written and executed engagement agreement between Ahaji Amos, PLLC and its clients. Ahaji Amos can be reached at firstname.lastname@example.org. More information can be found at https://ahajiamos.com.
I’m on YouTube!
Ahaji Amos, PLLC