Attorney Contract Reviews
Q: I've been approved for a franchise I really want to buy. They've given me the UFOC and the contract. The franchise salesperson told me it was a standard contract and not negotiable. Since I can't change it, do I really need to pay an attorney to read it?
A: If you've reached the legal age of majority, you can sign any contract you wish to sign. However, remember the old adage: He who acts as his own attorney has a fool for a client. We believe this saying justly describes those who don't have their franchise agreements reviewed by a professional before they sign them.
Regardless of what has been said or implied during your discussions with the franchisor or with other franchisees in the system as you go through the approval process, what's written in the contract is what will rule your relationship with the franchisor. The value of having an attorney review a franchise contract lies not in their ability to beat up the franchisor and "get a better deal" for you but in their ability to make sure you fully understand what you're getting into when you sign the contract. They can explain the different provisions, compare the provisions in the contract you're about to sign to what are considered "best practices" in the industry, and tell you how the courts have interpreted similar provisions in other cases.
Everything in the franchise agreement is important. However, we suggest you pay particular attention to the following:
- "Regarding territory" clause. Does the contract grant you an exclusive territory? How close can the franchisor establish another unit? Does the franchisor reserve the right to sell the same product through different channels such as the Internet?
- "Regarding supplies" clause. What must you buy from the franchisor? What can you buy from other suppliers?
- "Your right to sell the business" clause. Does the franchisor have the right of first refusal? Do they have the right to approve a potential buyer? If so, what criteria are used to evaluate a candidate?
- What happens to your business in the case of your death or disability?
- What support must the franchisor provide and what may they provide?
- Under what circumstances can the agreement be terminated, and what are the effects of termination?
A word of caution: Having an attorney review your franchise agreement doesn't absolve you of the responsibility to read it thoroughly before you sign it. In fact, we recommend you read it and make a list of your questions. Then give them to your attorney.
Franchise law is a legal specialty. Therefore, the most efficient way to conduct the contract review is to use a franchise attorney rather than the attorney who reviewed the purchase agreement for your house or who drew up your will. If you need a referral for a franchise attorney, contact the International Franchise Association's Council of Franchise Suppliers at http://www.franchise.org.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummies and a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.