By Brian A. Loffredo, Esq. Franchising is here to stay. From fast food to home health care, there are few business sectors devoid of franchised concepts. However, while the idea of franchising is well-known, there are widespread misconceptions about the relationship between franchisors and franchisees. Set forth below are six myths of franchising for potential franchisees to consider:
- Franchisors only make money if their franchisees make money. Technically, franchisors can only succeed if their franchisees succeed. A franchisor without franchisees receives no ongoing royalty stream to sustain its operations. However, most franchisors also collect substantial initial fees at the outset of the franchise relationship. These initial fees vary from franchise to franchise, but typically amount to tens of thousands of dollars. These initial franchise fees are tied to “enlisting” new franchisees, and not the success of those franchisees.
- Franchisors are responsible for marketing. While it is true that many franchisors engage in national or regional marketing efforts to further their brands, most franchisees will still need to engage in marketing and promotion of their franchise. Many franchise agreements require franchisees to spend certain amounts on marketing each month, either individually, or in tandem with other franchisees. Furthermore, while most franchisors collect periodic sums from their franchisees for marketing purposes, the typical franchise agreement gives franchisors complete discretion to determine how and where those funds are used. There is no guaranty that any marketing will be spent on any particular franchisee or geographical area, or on any particular media type.
- I can sell my franchise like any other business. Many franchisors will permit franchisees to sell their franchises, so long the purchaser meets certain standards. However, most franchise agreements do not give franchisees an unfettered right to transfer, and most set forth numerous conditions which must be satisfied prior to the transfer. When entering into a franchise agreement, franchisees should verify that their franchise agreement supports their desired exit strategy.
- I can quit my franchise whenever I want. Franchise agreements are valid and binding contracts. Most of them provide for a specific duration, including an expiration date. If a franchisee terminates the agreement prior to the expiration, that termination can in many instances be considered a breach of the contract, entitling the franchisor to damages. While it is possible to negotiate an exit-strategy, franchisees must always remember that the decision to leave the system requires careful consideration.
- Franchise Agreements are not negotiable. Franchise agreements are important because they govern the relationship between franchisors and their franchisees. In order to maintain uniformity among the system, most franchisors do not volunteer to make changes to their agreements. However, despite popular belief, many franchisors are willing to make changes to their agreements, including changes to clarify ambiguities which can lead to disputes later in the relationship. Whether or not a franchisor will agree to modify a franchise agreement depends on myriad factors, such as the desire-ability of the franchisee, the size of the system, the nature of the changes requested, the expansion goals of the franchisor, and other similar factors.
- Protected territories provide absolute protections. Many franchisees are afforded protected territories in their franchise agreements. However, there are wide variations among franchise agreement as to how strong those protections are. Many franchise agreements appear to provide protected territories, but do not. Also, some franchise agreements contain provisions that eliminate a franchisee’s protected territory, or reduce its strength, upon the happening of certain events. Franchisees must be certain that they understand the protections that are afforded to them, and must be certain to review these protections along with the franchise agreement as a whole.
The above represent only a few of the common misconceptions regarding franchising. In order to dispel any confusion regarding the relationship and the franchise process, franchisees should always speak with competent counsel and other franchise-industry professionals prior to signing a franchise agreement.
Brian Loffredo is a commercial litigator with more than thirteen years of experience representing clients in the franchise industry. Prior to joining Offit Kurman, Mr. Loffredo worked at a franchise litigation boutique specializing in the representation of franchisees. He can be reached at 301.575.0345 or email@example.com.