Dispelling Four Myths For Franchisees

Dispelling Four Myths For Franchisees

by | Jul 28, 2022 | Blog, For Franchisees, For Franchisors

There are many misconceptions about franchising that franchisees and business owners should know. These franchise myths often emerge from people who might be misinformed and websites that might be biased. Where your business is concerned, never let anyone give you wrong information. Franchisees should contact a franchise lawyer to learn about their rights and obligations as franchise business owners. 

Some myths that we hear include the following:

Myth 1. Prospective franchisees need the franchisor’s permission to speak with other franchise owners in the system. 

Contrary to this idea, when you are considering acquiring a franchise and are investigating the purchase, you have the right to speak with all of the other franchise owners in the franchise system as well as the franchisees who left the system in the prior year. 

The current and former franchisee contact information is included in Item 20 of the Franchise Disclosure Document (FDD) to allow prospects to reach out and consult with other franchisees. This is an invaluable opportunity to receive pragmatic and honest information about the franchisor and the industry.

Also remember that if you buy the franchise, your information will also be included in the FDD and someone may eventually call you for your insight. Find more tips on what questions to ask here.

Myth 2. You have exclusive rights to a development area once you have developed all of your franchises.

There is a difference between protections and exclusivity. Area development agreements (ADA) typically grant a franchisee (or multi-unit operator) a protected area in which to open a predetermined number of franchises pursuant to a specified time period. But these are not exclusive rights.

Time is always a key factor outlined in ADAs. Franchisees have a certain amount of time to open their units or risk defaulting on the agreement. For example, you may be permitted to open three units, one-per-year for three years. The length of time will vary by franchise system and the number of units planned for your area. 

Since it takes time to develop multiple locations, these ADAs often preclude other franchisees from opening units within the same area during the development period.

However, once the schedule has been completed and the locations are open, the protection ends and is replaced by the territorial protections, if any, granted to each location. For example, assume you have development rights to open three restaurant locations in the Hudson Valley. Once you have opened all three, the ADA will expire and any protections you had regarding development in the area will also expire. 

Myth 3. On renewal, you will continue to operate your franchise as was operated prior to expiration of the initial term. 

Often, franchisees are granted the right to operate a franchise for some specific period of time, e.g., 5 or 10 years. The franchisee will then likely have a right to renew the franchise for an additional period of time, e.g., another 5 or 10 years. However, “renewal” does not mean renewing the franchise agreement as originally signed. Rather, the franchisee will have to sign the franchisor’s then-current form of franchise agreement which will likely be more onerous than the original agreement. This is common in franchising – franchisors often modify their franchise agreements over time and when the franchisee is eligible to renew the franchise, the agreement may contain significantly higher fees or new operating procedures. 

Never assume that the renewal agreement will be a copy of the previous one, albeit with a new date at the signature line. A thorough comparison by a franchise lawyer is necessary to protect your rights and interests.

Myth 4. You cannot negotiate the terms of your renewal agreement. 

Neither federal nor state franchise laws prohibit franchisors from negotiating franchise agreements with franchisees. So, when the franchisor’s salesperson says it is against the law to negotiate, confidently know that is not true. But whether or not your franchisor will negotiate and to what extent, depends on many factors.

The first step is to have your franchise lawyer compare the original agreement against the proposed renewal agreement. The franchisor, unwittingly or knowingly, may omit details that were included in the original agreement. Lusthaus Law recently encountered this scenario while representing a franchisee client in connection with a renewal; our attention to detail ensured that the client would receive favorable terms that were nearly missed.   

There may also be new provisions that could cost a significant amount of time, effort and money that may be negotiable depending on the franchise system and the franchisee’s specific situation. If there are terms that are particularly concerning they should be addressed with the franchisor prior to execution of the new agreement. 

No franchisor will modify their agreement unless you ask. But even if they refuse, the upside of your efforts to negotiate is that you will learn more about the franchisor’s management — the people with whom you are considering extending your business relationship.

We Can Help

Lusthaus Law P.C. has a proven record of assisting franchisors and franchisees with their business operations at every stage of development. We are committed to our client’s success and keep our finger on the pulse of the industry to ensure that we provide the best and most up-to-date franchise law counsel.

Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path towards your franchise’s successful future.

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