Risk comes with any business venture. Entrepreneurs planning to purchase a franchise will sign an important document: the franchise agreement. It is crucial to the success of your business that you be aware of the perils and pitfalls of franchise agreements.
Hidden Costs and Fees
Of course, you knew about the initial fee before you signed the franchise agreement. However, provisions in the agreement may indicate future franchise-related fees will be charged. For example:
- Marketing and advertising fees. Your franchisor may plan marketing campaigns and ads, then have you pay a percentage of the cost. Whether the ads are beneficial to your store or distribution area may not matter.
- You may be required to pay your franchisor monthly royalty fees. Typically, this fee is based on a percentage of your sales.
For instance, if the franchisor decides all stores must be remodeled to fit a new look, the franchisee typically pays at least part of the cost.
Unreasonable Restrictions in Franchise Agreements
In addition to fees, franchise agreements usually set forth limitations on franchises. Depending on the type of business, your agreement may contain provisions that:
- Limit your creativity,
- Limit distribution area,
- Restrict the products you can sell, and
- Require certain types and amounts of insurance.
In some cases, the restrictions may be reasonable. However, it is still important to review franchise agreements with your attorney before signing on the dotted line.
Two-Way Flow of Information
Franchisees typically receive important data from their franchisors. This information may help them make realistic plans for their company, but also may be covered by non-disclosure agreements.
However, franchisees may also be required to send data back to the franchisor. Look for privacy provisions in your franchise agreement, as well as non-disclosure agreements. Additionally, your franchisor may retain the right to audit your books.
Avoid the Pitfalls of Franchise Agreements. Talk to a Business Lawyer.
As with any business transaction, it’s in your best interest to have your legal documents reviewed by a business attorney.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed tm. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. we represent clients throughout South Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, and surrounding communities.