December 11, 2018
Are you considering becoming a franchisee and operating a franchised business? Are you currently operating a franchised business? Are you looking at a franchise agreement and wondering what on earth you are reading? We at Dady & Gardner understand that franchise agreements are generally quite confusing and hard to parse. That is why we have compiled a list of the top eleven things for you to look for in reviewing a potential franchise agreement or an existing agreement. If your agreement has all, or almost all of the following things, you have a favorable franchise agreement:
- A good definition of the product line. Our clients like to know that, if they continue in the relationship, they will be able to handle the entire array of products and services currently being offered as well as all new and improved variations thereof.
- Protection against same-brand competition. Our clients like to know that, if they are investing their life’s savings, and their life’s work, in building demand for the products in their trade areas, they will be able to reap the benefits of those efforts without same-brand competition (competition by fellow franchisees in the same brand or competition from the franchisor for its own account).
- “Do the job, keep the line” duration. Our clients like to know that, if they do a good job building demand for the products in their trade areas, they will be able to continue as the only representatives of that product line in their respective trade areas so long as they continue to capably perform; and, if their supplier should ever believe they are not capably performing, they will not be abruptly terminated/not renewed, rather they will be given notice of perceived deficiencies and a reasonable opportunity to address them, with termination/nonrenewal to follow only if the perceived deficiencies are not adequately addressed (Typically, distributor and dealer agreements have “early out” provisions for dealers and distributors; but franchise agreements typically do not have “early out” provisions for franchisees—something that, increasingly, is of interest to franchisees as they face dramatic changes in their franchisor/franchisee relationships, with no way other than litigation to get out of good relationships that have turned bad).
- Franchisors’ obligations. Our clients like a reasonable recitation by the franchisor that it will in fact provide some significant and meaningful support to the franchisee, and that, if fees are charged, they can expect to receive fair value for the fees paid.
- Franchisees’ obligations. Our clients like a clear recitation of what is expected from them, and, if the franchisor reserves the right to make changes in the future in the franchisees’ performance obligations, those changes should be subject to a“reasonableness” covenant (and, ideally, significant changes should first be run through a franchisee board of advisors to confirm reasonableness before implementation).
- Fair opportunity for a good return on investment. Our clients like to know that, if they work hard and do a good job, they will be able to make a good living, and that, as their sales increase, their income will increase at least proportionately.
- Ability to sell related products. For our nonexclusive dealership and distributor clients (whether designated as “franchisees” or not), it is important for them to be able to sell complimentary products and services.
- Fair dispute resolution procedures. Our clients favor swift, evenhanded dispute resolution procedures. They typically do not oppose arbitration or attorneys’ fees provisions, provided the arbitration is in an acceptable venue, and the “attorneys’ fees provision” means that the prevailing party (not just the franchisor) gets attorneys’ fees from the other side when they win. They also don’t want to have to disclaim otherwise available statutory protection, or unduly limit their right to recover damages from their franchisor if it breaches its duties. Our clients typically don’t mind indemnifying the franchisor for the franchisee’s own mistakes, provided the franchisor is willing to make a reciprocal indemnification promise (and provided that neither indemnification promise is too broad).
- Right to sell/transfer. Our clients want the ability to sell the businesses which they have built for fair value, or transfer them to a son or daughter, without undue interference on the part of the franchisor (“Reasonable discretion” with respect to the franchisor’s right to approval is fine; arbitrary discretion is not). They don’t like franchisor rights of first refusal, as they tend to depress sale values. Our clients are becoming increasingly worried, in this day of mergers among competitors, and leveraged buyouts, about the franchisor’s unfettered right to assign its side of the contract.
- The right to do something else. If our clients are going to close or sell their businesses—particularly where the closings or sales are forced by the franchisor—our clients want the ability to make a living doing what they know (subject only to fair covenants against competition the actual buyers of their businesses might reasonably require).
- Good faith and fair dealing. Our clients like a written commitment from their franchisors that states what business people intuitively know, as follows:
“The parties to this relationship agree to deal with each other honestly, fairly, in good faith, and in a non-discriminatory, commercially reasonable manner.” (Who can be against that?!).
Are you thinking of purchasing a franchise? Our experienced attorneys regularly review franchise agreements in order to help preserve prospective franchisee’s rights early on. For more information regarding our franchise agreement review, contact one of our franchisee attorneys today.
*This blog item was revised adapted from “Michael Dady’s Top Ten List of Things to Look for in Franchise Agreements” Copyright © 2002 by J. Michael Dady, with the copyright author’s consent.
*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.