Understanding Franchise Contracts

Franchise contracts...do they stink?

Last week, I had a franchise candidate ask me about “the contract”. He looked through it and was unsettled. He wanted my expert opinion on franchise agreements. Man…what a classic moment in helping folks figure this all out!

Have you ever read a franchise contract and said, “Oh boy, I can not wait to sign this”? Having said that, when you know you are with the right company you are good with it.

The question for the average franchise candidate...Have you ever read a franchise contract and felt violated, maybe slightly abused, or maybe like you’re about to be taken advantage of. We all have.

I’ve never read a franchise contract that I was about to sign without feeling anxiety. I realize it’s just my own personal reaction, at the same time, I know I’m not alone. These things drive me nuts. What I do realize after being in the franchise industry for 38 years is that in fact, these tough contracts are necessary. They have to exist for a franchise company to succeed and in fact excel. You can’t have a strong franchise company with a week contract, it just doesn’t exist.

The company has to have the right and teeth in its contract to get rid of weak franchisees that don’t follow the system. Maybe they’re just not financially strong enough. Maybe they’re just not operationally strong enough. Maybe they just don’t believe in the direction of the company and so refuse to follow the company’s directives. There are many reasons why a company needs to have the teeth to create consistency, hold people accountable, develop the brand, maneuver as industries change, develop new technologies and ultimately have the ability to implement them.

If a company can’t do that, you don’t want to be a part of it. It’s critical for you as a franchisee to have a strong franchisor. It may not feel good when you read the contract and it may not feel good if you’re the one who gets a little out of line and needs to step back in, but it’s necessary to develop the brand.

To build a brand and maintain a brand is a big job. It takes strong leadership and a focused constitution. Protecting you as a franchise owner against other franchise owners that may not be strong enough, or care enough, or be willing to be part of the team, takes guts. That’s what you are, as a franchisee, on a team. It is you as a franchisee, as a fellow franchisee, and you as part of a growing, dynamic system that ultimately builds a strong brand.

In every franchise system, the more cohesive the franchisees and the franchisor are, the stronger the system. Sometimes that means towing the line when you don’t want to. Sometimes that means saying goodbye to a fellow franchisee who you may like but was not towing the line. That is just the reality, especially as a franchise grows, changes and develops into a bigger stronger organization. There will always be weak links to any chain. If a franchisor does not have the teeth or is not willing to take action, the entire brand suffers. Not good for your investment or anybody else’s investment.

It may not be comforting to any of us as we read a contract, but in the long run it’s necessary. So although these contracts seem to be almost offensive they are necessary and you need them to protect your own investment. Nothing is better than a great franchisee down the road from you, and nothing is worse than a bad franchisee down the road from you. You need a strong franchisor, just like you need fellow franchisees that are strong.

So be grateful for those of obnoxious contracts because in fact they are part of your lifeblood as a franchise owner.

I am not an attorney, I do not give a legal advice, and I’m not offering legal advice here. My point is simple. We need the strong contracts to protect our investments and to build a strong brand. Nothing is worse than a weak brand. Nothing hurts your investment more than a weak franchisor.

So even though these franchise contracts seem to stink, the one-sidedness is necessary. Make no mistake about it; it’s exactly what you want.

You can attend one of our shows and discover resources from the legal field and beyond to get a better sense of what to look for in contracts. Being prepared and understanding your playing field is critical to success.