Contracts are important. They protect you and the franchisor in whose business opportunity you invest, and they let you know exactly what you’re in for… if you read them.
In fact, not only should you read the contract you sign for your franchise business, but you should also consider having a franchise lawyer assist you so that you can be sure that you fully understand the provisions of the contract.
In general, you are bound by the provisions of the contract whether or not you fully understood them, regardless of what a salesperson told you, and no matter what changes in circumstances may befall you.
Here are some clauses you should watch out for:
- Gag orders are becoming more common, with disputes between franchisors and franchisees turning up in the headlines more often. A contract forbidding you to say anything about your experiences as a franchisee may not be a bad sign — many industries have non disclosure agreements as a matter of course — but it’s worth asking about.
- Lack of consistent renewals can mean that everything is great for the term of the initial agreement, but the business you’ve built up over the period of the agreement is no longer yours at the end of that time, without much higher fees or other big changes. Ask to have the renewal on the same terms, or at least set limits on the possible changes.
- An ability to change the agreement without notice is never a good thing in a contract, and some franchise contracts give that power only to the franchisor. A clause of this kind can remove all the protection a contract normally offers.
- A Big Mac is not a Big Mac if you choose ciabatta bread instead of a sesame seed bun, but do you really have to buy tomatoes from an approved vendor? Contract clauses that limit the franchisee to a single source for buying goods may be too restrictive. Try to keep restrictions where they need to be for brand integrity, but no more restrictive than that.
- One-sided competition clauses can keep a franchisee from competing with the franchise far into the future, yet still allow the franchisor to place another franchisee in the same neighborhood. Sometimes a franchisor can reduce a franchisee’s territory for any infraction in the franchise agreement, however small. Try to work out a reasonably even level of responsibility and protection.
- Sneaky phrases like “as needed” or “at the sole discretion of the franchisor” can slip past you, but they can cause trouble. If you’re required to pay 4% of your gross revenue into a marketing fund but the franchisor is only required to spend it “as deemed necessary,” you can be setting yourself up for disappointment and resentment.
Keeping an eye out for these dangerous clauses in your contract can help keep your franchisee/franchisor relationship friendly. Last word: take everything in the contract very literally, even if you have a salesperson telling you not the worry about it. The weakest ink is stronger than the strongest handshake.
