Learn to Evaluate a Franchise Agreement
It's one of the most important tools you'll get when buying a franchise . . . and the foundation of your relationship with the franchisor.
It's an unfortunate fact that many franchisees don't read their franchise agreements carefully and completely before signing on the dotted line. There's a reason for this: The agreements are long and complex documents written in the language of the law that tends to put the average reader to sleep. Worse still, many prospective franchisees, after reading the disclosure portion of the franchisors' Uniform Franchise Offering Circulars (UFOC), think they understand the deal and only scan the franchise agreement. Their comprehension of the deal may be partially right, but often it's tragically wrong.
It's important to understand that the purpose of the UFOC is to describe the relationship between the franchisor and franchisee. It's the franchise agreement, however-the written contract-that governs that relationship.
Looking back, a well-intentioned change in franchise disclosure-requiring them to be written in "plain English"-probably hurt more than helped prospective franchisees. The new standard often leads prospective franchisees to believe they understand the relationship as described in the disclosure document. Consequently, some franchisees, in trying to save money, forgo hiring attorneys to help them. Many franchisors recognize this frailty in the change to "plain English" and encourage-or even require-their franchise candidates to seek outside legal assistance.
By the time you begin your review of a franchise agreement, you've probably already met with the franchisor and toured its offices and some of its locations. Hopefully, you've also spoken to other franchisees in the system, evaluated the financial aspects of the relationship and conducted other steps in a proper examination. At this point, you're probably sold on the opportunity. Now you need to hire a franchise advisor.
Hiring An Attorney
Franchise law is a specialty. The local attorney who helped you close escrow on your house or write out your will probably doesn't have the franchise experience necessary to be of any real practical assistance. He or she may not know which issues may be negotiable and which aren't, or when something in an agreement is unusual and possibly unfair. For that, you need someone with experience. Two great sources for qualified franchise attorneys are the International Franchise Association's Council of Franchise Suppliersand Franchise Update Inc.'s Directory of Franchise Attorneys. Another good source is the American Bar Association's Forum on Franchising, which sells a directory of member attorneys for $35. You can reach the ABA's franchise forum at http://www.abanet.org.
Elements you and your attorney should be looking for in the franchise agreement include:
- Promises the franchisor made to you verbally when you met. If these promises aren't in the franchise agreement, they won't be part of the legal relationship, and the franchisor may not be required to honor those promises.
- Consistency between the franchise agreement and the disclosure document. Usually that's not a problem, but sometimes you'll find items you thought you understood in the disclosure document aren't quite the same in the legal agreement. Make certain the deal you sign up for is the deal you sign on the dotted line.
If you're working with a franchise broker, don't rely on him or her for legal advice. While most are honorable and knowledgeable, they usually get paid by the franchisor when they succeed in selling you a franchise. Even if they've been friendly and helpful in getting you together with the franchise system of your dreams, they work for the franchisor, not you.
One last piece of advice: Never sign a franchise agreement you don't understand, especially when it comes to the sections dealing with defaults, terminations and what happens when the relationship between you and the franchisor ends-and it will end at some time. Clarify the issues you don't understand, try to negotiate those points that don't fit your needs, and rely on an experienced franchise attorney to assist you in making your franchise decision.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid recently co-wroteFranchising for Dummies(IDG Books) with Wendy's founder Dave Thomas.