Thinking About Buying a Franchise? Try to Avoid These 7 Deadly Sins
As franchise attorneys who regularly represent franchisees, dealers and distributors, we often see our clients only after they have run into trouble or lost every dollar they ever had and every dollar they could borrow. Sadly, financial troubles also take a personal toll. We see a great number of people whose financial troubles as a franchisee have also led to a marital break-up. Given the catastrophic impact that a failed franchise investment can have on a person, we would expect that a person considering a franchise opportunity would follow his franchisor’s advice and have a qualified franchisee attorney review the Franchise Disclosure Document and Franchise agreement and provide legal advice. Unfortunately, that does not generally happen. And that is one of the 7 Deadly Sins often committed by prospective franchisees. In this post, we will review all seven.
1) Not hiring a qualified franchise attorney before signing up. This is the greatest sin. Remarkably, many people will pay and borrow $100,000 to $4,000,000 to invest in a franchise, but will not pay $3,000 to have a franchise lawyer review the documents in advance. Signing something you do not understand without getting available and affordable legal advice is a terrible idea, and it often comes back to burn franchisees. Hire a qualified franchisee attorney like the folks at Dady & Gardner franchise law firm.
2) Assuming franchisors will not negotiate contract terms. We have represented numerous franchisees interested in numerous systems. Most franchisors will negotiate terms if they truly want you as a franchisee. When you are trying to negotiate better terms, the exercise may be worthwhile just as a means of evaluating your potential franchisor. Your franchisor will never treat you better than they do when they are trying to woo you. If your franchisor treats you in a harsh and authoritative way before you ever sign up, how do you think they will treat you once you have signed a binding agreement? The answer is, invariably, “even worse.”
3) Failing to set up a corporation or LLC, or operating with different entities responsible for different things. If you plan to operate your franchise through a corporation or LLC, get your business set up before you sign the Franchise Agreement or a Lease or any other legal document. While you may be asked to also sign a personal guaranty, it makes sense to have everything set up in advance exactly the way you want it. Consult with an attorney and accountant for legal advice, including tax advice. There are a number of reasons to have everything in an LLC or corporation, including avoiding personal liability for negligence claims and for purposes of paying royalties and otherwise dealing with the franchisor.
4) Signing unlimited and unnecessary personal guaranty documents. If your father has nothing to do with the franchised business, but is only lending the business money, should he have to sign a non-compete agreement? No. Should he be liable if you violate a confidentiality provision? No. If 2 years into a 20-year agreement, your franchise goes bankrupt because no one wants your franchisor’s products, should all of the guarantors (some or all of whom may have significant assets) risk paying $600,000 in imputed “lost future royalties” for the failed business? One would hope not. Yet every single day people blindly sign unlimited personal guaranty documents, committing deadly sin #4….generally because they also committed deadly sin #1.
5) Relying upon vague claims by the franchisor and its sales people. When someone tells you a flat out lie, a reasonable person might very well rely upon the person’s honesty. For example, if a date told you that he or she graduated from Harvard Business School (when they never actually got past the 10th grade), you would have no reason to disbelieve them. Sadly, unethical franchisors and rogue sales people sometimes lie to make a sale. That is the fault of the defrauding party. But franchisees sometimes make the mistake of relying upon extremely vague and ambiguous statements of the franchisor or its sales people rather than following up with basic questions. For example, franchisor sales brochures often say things like “awesome system” or “great support” or “employ certain proprietary methods.” If your franchisor is saying they will help you or provide support or have a certain “special sauce” that will make your franchise special, at least ask them exactly what the support will be and exactly what the special sauce is and how it is protected by a patent or some other legal right. Going back to the dating example, if your date told you, “I went further in school than my brother did” that question just begs for a follow up. The same applies to vague claims by a franchisor.
6) Agreeing to severe limitations on your legal rights. Toward the end of every franchise agreement is a section which may as well be entitled, “Ways you are surrendering your legal rights to us in return for nothing.” Here are some actual terms we have seen – you must sue us in 30 days or lose your claims; you must arbitrate with us at our corporate office (literally, IN the office); two late payments in a year is grounds for immediate termination without opportunity to cure; you agree that if we breach the contract that you cannot sue us for damages; we can sue you for damages, but you cannot sue us for damages; we can sue you, but you must arbitrate with us; if we win, you pay our attorney’s fees, but, if you win, we will not pay yours. The list goes on and on. You may end up signing an agreement that so restricts your legal rights that you, in effect, have none.
7) Not being self-aware. People are notoriously poor at self-evaluation. Surveys show that something like 75% of people believe that they are a better than average driver. Someone who hates taking direction will not be a good franchisee. The franchisor generally exercises a great deal of control over its franchisees. If you don’t take direction well, think of something else to do. Someone who does not want to work 60-100 hours per week will generally not be a good restaurant franchisee. A very bright person with a terrible personality will generally not be good operating a service franchise where he or she has to deal with the public every day. Before you buy a franchise, fill out a sheet with your strengths and weaknesses, and then ask a friend or family member who will tell you the hard truth to fill out a sheet with your strengths and weaknesses. (If you cannot think of any such person, that may tell you something about yourself as well.) Sit down and compare the two sheets. You may find that what you think about yourself is not at all what other thinks of you. You may think you are a life of the party people person whose jokes everyone loves. Others may see you as an introvert who seems distant and odd. You may think you are a “hard worker” while others see you as a person who is at work a lot but who wastes a lot of time. In any event, take a good hard look at yourself. Even if you don’t buy the franchise, it may be a very eye opening exercise.
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