Franchise opportunities can be profitable for those who meet the requirements established by franchisors. However, there are risks inherent in buying a franchise business, including the possibility of contract violations and unexpected expenses. A careful review of a franchise contract is critical for the protection of those buying into a franchise.
What terms are among the most important to review when assessing a potential franchise business opportunity?
1. Territory protections
The more successful a franchisor is, the more local prospective franchisees may want to open locations. Reviewing the geographic area protected by the franchise agreement is important. Validating how long those protections last and when a franchisee can expand them can also be important considerations.
2. Investment requirements
Frequently, franchisors require that franchisees have six figures in liquid capital. They may also need to make ongoing investments to renovate and improve facilities or contribute to local marketing efforts. Franchisees may need assistance in determining exactly what financial obligations the contract imposes.
3. Termination details
The end of a franchise agreement is as important as the beginning of the arrangement. Franchisees are often subject to restrictive covenants that prevent them from opening a similar business for years after the end of a franchise agreement. Additionally, they may be subject to major expenses if they terminate the agreement early.
Reviewing restrictive covenants and cancellation rules for a franchise can be critical when determining if an opportunity is the right one. Working with a business law attorney can help potential franchisees read the thorough contracts that franchisors require and negotiate terms that protect them, not just the franchisor.