How to Avoid Franchising Legal Pitfalls

Part of the Franchising For Dummies Cheat Sheet

If you’re considering starting a franchise, or already have, remember to do your homework regarding franchise law. You don’t want to get stuck in a franchise agreement without knowing the facts and where to go for help, if needed. Use these tips to avoid falling into legal problems:

  • Seek advice from only those franchise lawyers and consultants who have a serious depth of experience in franchising. Avoid working with the franchise packaging firms that offer you a one-stop shop of services, which may include preparing your legal agreements, and make it seem that the process of becoming a franchise is simple and always successful. Franchising can be extraordinarily successful if you work with professionals throughout the process.

  • Don't assume you have any rights not stated under the franchise agreement. If the franchisor hasn’t given you rights, then you’relikely not entitled to them.

  • Consider your exit strategy. When the relationship is over, operating independently may not be an option if you’re bound by a post-termination non-competition agreement.

  • Be careful of what you may guarantee. Often the guaranty you may be asked to sign will make you personally liable not only for past-due royalties and advertising fees but also for damages resulting from any early termination of the franchise relationship or for any obligations under the franchise agreement.

  • Know a franchisor’s rules before investing if you want to own a separate business. You may own your own business as a franchisee, but you will need to follow many of the instructions of the franchisor even when you may not agree with them.

  • Get everything in writing from the get-go. If you’re relying on any promises made by the franchisor or his or her sales personnel or brokers in making your franchise investment decision, get them in writing as part of the franchise agreement.

  • Carefully read Item 11 in the FDD. You need to know in advance the services you’re entitled to receive from the franchisor. Those are the ones they are obligated to provide you with.

  • Make sure you understand the boilerplate in the agreement. If times get rough between you and your franchisor, that’s the language you’ll be living with.

  • Know the difference between a franchise broker and a consultant or advisor. Nowadays, many franchise brokers call themselves consultants or advisors. Find out whether the advisor you’re working with gets a commission from a franchisor for introducing you as a candidate for their franchise — brokers work for the franchisor, not you.

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Franchising For Dummies Cheat Sheet

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