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What are the Most Important Provisions in a Franchise Agreement

Purchasing a franchise is a significant, life changing transaction. The Franchise Agreement you sign will contains not only your financial obligations, but more importantly the restrictions and limitations put on you, your spouse and your business. The franchise agreement you will be signing is included in the lengthy Franchise Disclosure Document (FDD) the Franchisor is required to give you as part of the sales process.

When I am hired to review an FDD -my review of the Franchise Agreement will focus on 3 main areas: 1--the transfer section, 2- the termination section, and 3-the dispute resolution provisions. These 3 areas are the most important in determining the franchisee's rights and options.

1--With a transfer, the definition of "transfer" is critical-many franchise agreements say "any interest" or "any interest more than XX %" (a small percentage) constitutes a transfer. If the franchisee wants or needs to transfer only a minority interest to raise some funds for example, or seeks to buy back a minority owner's interest, or wants to bring in a family member as a minority owner, or a minority owner dies or any number of potential small ownership transfers, the "new" owner must comply with all the onerous transfer requirements, paying a fee, signing a new franchise agreement, going to training, etc. this is extremely onerous for a minority owner who is not actively involved in the business.

2-The Termination section is really the "default" section and outlines all the ways a franchisee can be in default, what the cure periods are, if any, and the fact that a termination can apply to an uncured default-this section can be many pages and might contain very broad and general references to "not following the operations manual"-which can mean an extremely minor deviation might lead to termination. This section is always followed by a section indicating what happened after termination. Most of these "after termination provisions give the Franchisor the right to buy the franchisee's assets and take over the lease (which is not the same as the sale price of selling the business as a whole). The biggest problem is it almost always applies to "after expiration" as well, which means if the franchisee did everything perfect and at the end of the term and does not want to renew, the franchisee will be hit with the potential of losing that great business the franchisee built up.

3-Dispute Resolution-this is of course the MOST important since ANY dispute must follow this set of requirements. Some Franchise Agreements require formal mediation first. Most require binding arbitration. Most require those actions take place in the Franchisor's home state, which may not be enforceable in some states including California. Many times there is a limitation of the timeframe within which to bring a claim of lose the right to do so (a shortened statute of limitations). This provision may be hidden and difficult to find.

California overrides other states laws in certain areas, so it is important to have an understanding of these areas.

In addition, the FDD must contain ALL potential contracts you will or may be required to sign, not just the Franchise Agreement. More often than not, there will be many other "contracts" which are exhibits or addenda to your franchise agreement, each with specific requirements and legal obligations. These are all equally important and have their own legal ramifications and risks such as the Personal Guarantee, and a Non-Competition Agreement.

Having an experienced franchise attorney can help a potential franchisee navigate these important terms in the franchise agreement, as well as others, and negotiate the potential risks.

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Click Here to Review Articles by Janet Martin on Important Franchise Law Issues