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Posted on Dec 25, 2010

10 Provisions In Your Franchise Agreement That Deserve Your Attention

So let's say your dream franchise has been chosen, your franchise application and loan have been approved, and all that remains is to sign the franchise agreement. Don't let excitement precede judgment, for this is the time when attentiveness to detail is most critical. Make sure to review all documents and be ready to negotiate - your choices now will have impacts for years down the road.

Here are 10 provisions that every potential franchise owner should try to keep on their own terms.

Personal Guaranty

A guaranty is a pledge used as security to fulfill a debt. Franchisors want all potential franchisees to sign a guaranty and are also known to solicit the spouses. It is important to try to avoid any type of guaranty and stop any co-spouse agreement cold in its tracks. Agreeing to a guaranty pledge will put your personal assets at risk. If a guaranty is inevitable, try suggesting a limit to the guaranty duration or to the size of financial exposure you are accepting.

Trademarks

Make sure the franchisor offers adequate support in the event that a third party files a trademark infringement claim. This includes covering all costs of damages and any rebranding. The trademark is a major component of what you are paying for in your fees and royalties as a franchisee, and no franchisee should be held responsible for a franchisor's mistake in this critical area.

Transfer

When studying the sale and assignment of a franchise agreement, consider the following conditions: Look at the transfer fee and make sure it is reasonable and only compensating the franchisor for their fees. Try to keep to the current agreement instead of signing for a new one, as the agreements may differ.

Renewal

Just as with the transfer clause, the provisions for renewals may specify that franchisors reserve the right to offer a new contract. Communicate your desire for consistency and also make sure the renewal fee is not excessive.  If you achieve great success in your franchise unit, you do not want to be subject to dramatic changes in terms when you look to renew your franchise license in 5, 7, 10, or more years.

Modification

Franchisors will want the right to modernize units during the term. Negotiate a comfortable interval between each renovation. Furthermore, make sure that the expense is capped. Any modernizations should be system-wide, so you are not bearing higher costs than your peers elsewhere in the region or country.

Electronic Funds Transfer

Franchisors often have access to franchisees bank accounts for royalties, advertising fees and other obligations. Try to eliminate this. There is no reason to expose financial stability to the chance of critical errors. If it is inevitable then open a fresh business account that the franchisor can access, keeping your personal bank accounts safely separate.

Inspections

Do not sign any agreement that allows franchisors access to inspect your premises without notice. Make sure to specify adequate times as well as a time of notification. Surprises should be reserved for birthdays, not venue inspections.

Audit

Limit the frequency of auditing. Royalties and/or advertising fees are based on a percentage of sales. Franchisors want the right to audit records to confirm the accuracy in payments. If a shortage is discovered, the franchisee will suffer a large penalty. Therefore, ask to limit auditing and ensure that any discovered errors do not result in large penalties. At the very least, you should have an opportunity to correct your first few errors. There should not be any punishment for an honest mistake.

Territory

Franchisors should not promote internal competition. They should provide their franchisees with exclusive territories, free from encroachment. On the other hand, be careful of carve-outs that include airports, colleges and hospitals. Franchisors will often try to increase revenue by placing a franchise outside of an institution as well as a franchise within. (Always check the fine print for this clause).

Be aware of the use of direct mail, catalogs, supermarkets and other “alternate channels of distribution.” This will always affect small businesses at no cost to the franchisors, because customers will be able to order directly from the warehouse. Try to avoid performance minimums that requires a quota of sales to maintain a solid territory. There are cases of franchises reducing territories because a franchisee fails to hit the minimum sales quota.

Default

A franchisor should not terminate an agreement without notice. Provisions for termination with notice should only result in severe cases. In addition, ask for a sufficient grace period that allows time to plan for the hard times ahead.

Entire Agreement (Bonus)

All contracts have a summary of the entire agreement; however, sneaking in provisions is common; however, these regulations cannot be enforced if they are not outlined in detail before. The summary should not be embellished in any way, even if it looks like a clause that is more beneficial to the franchisee. Eliminate all deviations.

Remember that this advice is only the tip of the iceberg. Potential franchisees will be best served by retaining the guidance of a qualified franchise lawyer. Remember, you are making a very substantial investment and this decision deserves your time and attention.

This article was written by Kenneth F. Darrow, who has been practicing law for over 40 years, and is recognized nationally in the field of franchise law, with over 30 years experience in that area. Read more about the Law Firm Of Kenneth F. Darrow, P.A. at http://www.kfdarrowlaw.com/.

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