Three Deal-Breakers in Franchise Agreements


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A franchise may be the perfect way for budding entrepreneurs with little capital and/or little experience in operating a business to get started with their own business.

When you choose to operate a franchise, a larger parent company agrees to permit you to sell their product or service – and oftentimes agrees to assist you in establishing and operating the business – in return for a certain amount of your business’s profits. Many fast food chains and local offices of national service providers (such as pest control businesses) are franchises.

Beware
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Of Deal-Breakers In Franchise Agreements

Despite the benefits that franchises may offer, they are not for everyone. Before you sign a franchise agreement, take a careful look at the agreement itself (preferably with the help of a knowledgeable and experienced California franchise attorney). Be wary if the agreement contains any of the following “deal-breakers”:

Not enough start-up support: Even with a well-known brand, starting a new business of any type can be difficult. Be certain that the franchisor agrees to provide you with enough support during your first few years so that you have the best opportunity for succeeding in your venture. A franchisor that is not willing to invest in your success (i.e., by providing you with training or access to a convenient source for necessary start-up equipment) may not be the best business partner.

Liquidated damages clauses: A liquidated damages clause in the franchise agreement benefits the franchisor at the expense of the franchisee. In the event the franchisee breaches the franchise agreement (in the event the franchisee cannot turn a sufficient profit, for example), this provision specifies that the franchisor will receive a certain amount of money as damages. If you have no resources, however, meeting this obligation can be extremely difficult. Instead, inquire about a “buyback” provision whereby the franchisor retains the right to repurchase or repossess the franchise in the event of a breach.

Mandatory arbitration clauses: Forced arbitration in any sort of contract usually benefits one party at the expense of another. In agreeing to submit any claim or dispute to arbitration, you as a franchisee may be giving up important legal protections that you would otherwise have in a courtroom setting. One of the chief disadvantages is that the franchisor is often able to select the arbitrator, who then (generally) is predisposed toward the franchisor. While arbitration may be a useful means of resolving a dispute you may have with your franchisor, being forced to resolve all disputes in this matter without any additional methods for seeking redress of your grievances can be disastrous for you and your franchise business.

ABOUT THE AUTHOR: Jim Gulseth
James H. (Jim) Gulseth was born and attended high school in Devils Lake, North Dakota and graduated with an A.B. degree from the University of California at Berkeley. He earned his JD degree at the University of California Hastings School of Law in San Francisco. He is a member of the Corporations, Business Transactions, Securities and Tax and Intellectual Property Sections of the State Bar of California and is a member of the State Bar of California, the Alameda County Bar Association, and a member and past President of the Eastern Alameda County Bar Association.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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