Q: I have been approved for a popular sandwich franchise. This is my first time in a business. What is the most important language to look for in a franchise contract?
A: A franchise contract is a long and complex legal document that will bind you and the franchiser to certain responsibilities. It’s a good idea to review the contract with a lawyer, especially since this is your first time in business.
Be aware, though, that this review is mostly to let you know what you’re getting yourself into—you won’t have much bargaining power with the franchiser. And once you sign on the dotted line, you will be taking on significant obligations.
It’s best to conduct your due diligence well ahead of time. That includes reviewing not only the contract, but also the disclosure statement that franchisers are legally required to provide before you sign. The disclosure document can spell out details such as how much you’ll have to pay for advertising.
One of the most important considerations to keep in mind when you’re reading the deal: Can the franchiser sell another outlet close to your business, including an airport kiosk or a counter in a megastore?
“Be wary of intrabrand competition. If they can put someone across the street, that will hurt you,” says Ronald Gardner, a lawyer with Dady & Gardner in Minneapolis. Also check with the franchiser to see if anyone else owns franchise rights in your area but hasn’t yet built an outlet.
Look for other types of competition, too, such as the franchiser’s right to sell branded products like salad dressing and taco shells in the supermarket. If people can buy those products and cook them at home, they might be less inclined to stop in your store to grab a bite.
Some franchisers require you to run the shop yourself, instead of hiring a manager, says Harris Chernow, a lawyer for Chernow Kapustin LLC in Horsham, Pa. This could be a problem if you have another job or other responsibilities. The contract may also prohibit you from buying franchises from other companies or owning a local, independent business that could be deemed a competitor, Mr. Chernow says. You may also need to get approval to buy more franchises from the same company, or sell the one you own.
Finally, be aware of the risks you may take if there’s a legal dispute. The contract may require you to submit to arbitration or go to court in a city far from home. “On the day you’re signing up, it’s the happiest day of your life,” says Mr. Gardner. “People don’t stop and think, ‘What if this doesn’t work out?’ ”
Source: WSJ – Small Talk