Franchise

The Dirty Little Secrets Lurking in Your Franchise Contract

The Dirty Little Secrets Lurking in Your Franchise Contract
Image credit: 24oranges.nl | Flickr
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I left my franchise this year after 14 years. If anyone had told me two years ago I would now be building my real estate business as an independent, I would have laughed. I believed in the franchise and the name I was buying 100 percent -- until I didn't and was forced to leave. Franchise contracts are lengthy, usually unalterable and very much one-sided.

It wasn't until I left my franchise that I realized all these little nuances lurking in the contract. Before signing a franchise contract, watch out for these four dirty little secrets:

Related: Meet the Real Estate Franchise Backed by Warren Buffett

1. Noncompetition.

Most franchise agreements have noncompetition agreements. The language of such clauses sets the tone for what an entrepreneur can do after leaving a franchise business. It explains situations like if the contract is terminated whether he or she can continue to own the business involved without using the franchise name, trademarks and tools. It spells out if the businessperson can still work in the same field.

Talk to a franchise attorney to find out what's required after leaving a franchise arrangement and how enforceable the noncompetition clause is. Some states make noncompetition clauses very difficult to enforce, especially in instances when the entrepreneur takes all necessary steps to rebrand so that it's clear to the public that she is no longer operating a business as part of the franchise.

2. Automatic renewal terms.

At some point, a franchise agreement will end and the franchisor will send new franchise documents. Do not assume that the contract terms will be the same as before. Most likely there will be changes made since the original contract. One clause that I was surprised to find in my new franchise contract was for automatic renewal terms.

Let's say the old franchise agreement ends on Jan. 1 and the person doesn't immediately sign the new agreement because he has questions on the terms. A clause within the new contract might stipulate that if he doesn't immediately sign the new contract, he is automatically agreeing to the new franchise terms simply by continuing to operate.

I didn't instantly sign my new franchise agreements because my partner and I had many questions and concerns about changes in the language. The franchisor argued that we had accepted the new terms simply by continuing to operate our business while we were attempting to have our questions answered.

Related: Franchise or New Venture? That Depends on You.

3. Multifranchise owners.

My business has several offices and each office had its own franchise contract. The contracts all started and ended on different dates. When someone has multiple franchise contracts, she should determine what she wants to happen should she opt to not renew the franchise arrangement. The answer may be different depending on how many franchises are owned.  

I had several franchise contracts. If one real estate franchise contract ended, I could not just convert the office involved to an independent office. The franchise agreement does not allow for owning a company that competes with the franchise brand. The effect of such a clause makes it virtually impossible for a multifranchise owner to ever leave the franchise company. The owner is forever handcuffed to the franchise company by that clause.  Anyone with multiple franchises should try to have all the agreements end simultaneously in order to have options at the end of the contracts' term.

4. Competing family.

Know anyone with a friend or family member who owns or operates businesses that compete with his franchise? I would guess that this scenario is not unusual. My spouse also owned a real estate company. We originally met at a real estate conference. He, too, owned a franchise through the same franchise company. Technically, my husband and I owned competing real estate offices ever since we met. It didn't bother us. Both of our businesses were very successful. 

When I left the franchise company, the franchisor took away my husband's franchise. Why? There was a clause within the franchise document saying that a person cannot have a relative that competes with the franchise. In essence the franchisor took away my husband's franchise and handed it to his business partner. My husband then decided to join my independent real estate firm.  

When it comes to franchises, do the homework. In the excitement to start a business, an entrepreneur might be tempted to just sign on the dotted line without thoroughly reviewing and understanding the documents involved. A great franchise attorney is a sound investment for the future.  A franchise can be a great way to get into a business, but when the franchisor is no longer an ally, have an exit plan.

Related: 4 Reasons Why You Need to Hire a Franchise Attorney