Beware of Franchise Agreements

So You Want to Buy A Franchise

Have you ever been tempted to buy a franchise? Many people find an appeal in the idea of owning an already established business with its own marketing program. However, franchises are not a foolproof way to succeed in business. Be sure to read any franchise agreements carefully.

The Parole Evidence Rule

There is a general rule in contract law called the “parole evidence rule” or “four corners rule,” which simply states that any evidence that doesn’t otherwise appear inside the “four corners” of a contract, such as comments or promises made by one of the parties to a contract, cannot be considered by a court if those comments or promises contradict what is otherwise inside the contract’s “four corners.”

Think about that for a minute.

Suppose you are wooed by a franchisor promising your business the metaphorical moon and stars. Marketing support, increased business, significantly more revenues, the works. So enter into a franchise agreement. What happens if they are false promises? Can you terminate for breach of contract given the false promises, if those promises aren’t otherwise in the franchise agreement?

No, you cannot terminate, because of the parole evidence rule.

Before you ask, there are exceptions. However such exceptions will rarely save you from a bad deal with a franchisor. Anyone trying to sell you a franchise comes wielding an ironclad franchise agreement. Most franchise agreements are at least 40 pages or more, written by competent attorneys who specialize in contracts and franchises in particular, and they are written with enough precision to prevent any false promises from derailing the agreement.

Beware of Franchise Agreements

The other day, I had the unfortunate experience of a teary-eyed franchisee seeking my advice on how to leave a franchise. Here’s what happened: This small business owner maintained a successful practice with a few other family members. One of those family members was wooed by a national franchise. That family member convinced the others to go along, and they signed a franchise agreement without consulting with an attorney. Now said franchise agreement had many interesting clauses, including:

• Taking ownership of their phone number and customer list;
• Preventing them from advertising outside a very small territory of approximately 2 square miles;
• Containing a non-compete clause that prevents them from operating a similar business for 2 years after the franchise agreement terminates within 100 miles of their existing location;
• Taking a significant portion of gross revenue, with floors in place that ensure the franchisor gets paid, even if the franchisee doesn’t make enough money;
• Keeping the franchisee locked in, although permits the franchisor to terminate at any time;
• Keeping the business priced artificially low should the franchisee try to sell the business; and
• Once the agreement terminates, the franchisor can do whatever it wants, including finding a new franchisee to run the franchise even if the previous franchisee did a great job in building up the business.

And no, I’m not making this up. It’s completely legal too! Most franchise agreements are so absolutely one-sided, they can and usually do leave most franchisee’s bankrupt and destitute. This poor franchisee is an accounting firm, which raked in a significant six-figure revenue stream over this past tax season, but the owners saw none of that revinue — the franchisor took everything.

If You Must…

As an attorney, it’s very difficult for me personally to review franchise agreements because they are so one-sided and absolutely disastrous for my clients. If you’re thinking of buying into a franchise, please do yourself a favor and make sure you are represented by a good lawyer. Furthermore, I recommend doing your homework on the franchise. Pick up the phone and call other franchisees and ask them the following questions:

• Do you feel the franchisor is looking out for your best interest?
• Did you and the franchisor ever have a disagreement and if so, do you feel it was resolved fairly and honestly?
• Is the franchisor sympathetic to business downturns and/or difficult months where sales didn’t meet expectations?
• Does it seem like the franchisor is focused on making franchisees successful, or simply selling more franchises?
• Did you purchase the franchise directly from the franchisor, or from a franchisee? If a franchisee, can I get their contact details to talk with them?

In the end, the success of a franchise are going to depend on two things: First, did you make sure the franchise agreement is fair? Be sure to have a way to resolve everything if things aren’t as rosy as the franchisor promises. Second, do you have a good or a bad franchisor?

Good franchisors are those franchises who hang their success on not just selling new franchises, but in helping to make their franchises successful. Bad franchisors simply make money selling franchises, and the economics of the deal aren’t tied to franchisee success.

Law 4 Small Business, P.C (L4SB). A little law now can save a lot later.