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Franchise agreements are hard to understand, easy to violate

| Sep 15, 2020 | Development |

The benefits of buying into a franchise are numerous. You can start your business with a fully developed plan already in place, with the support and training of the franchisor, and with methods of day-to-day operations tried and proven to work. It can be an expensive investment that still carries some risk, but many find it a satisfying way to be a business owner that requires minimal experience.

Like most aspects of the business world, stepping into a franchise requires signatures on a contract. The franchise agreement is often complex and confusing to those who have limited experience with business law, and it is easy to end up in a serious disagreement over the terms of the contract. Having an attorney review the agreement before signing it is always a wise idea, but some franchisees may seek legal assistance only after a dispute arises.

What did you agree to?

You may be okay with having limited creative control over your business, but you will certainly want to have a clear understanding about what is expected of you and what you can expect from the franchisor. Sometimes, legal jargon buries these elements to the point that you may not understand what you are agreeing to. Nevertheless, if you sign the document, you are bound to its terms, including:

  • Your relationship with the franchisor
  • Your obligations to the brand
  • Protections for the intellectual property of the franchisor
  • Terms related to the transfer of the license
  • Details about the initial cost and ongoing fees

The franchisor will likely reserve the right to audit your business periodically to ensure you are working within the terms of the agreement. If the franchisor learns, through the audit or at any other time, that you have violated the agreement, even inadvertently, he or she may consider you in default of the agreement.

Facing the consequences

Defaulting on a franchise agreement can lead to serious negative consequences. The contract may state that the franchisor reserves the right to take legal action in civil court to recoup any damages he or she claims are the results of your violation of the agreement. Depending on the circumstances and the current laws in California, a judgement against you may result in thousands in fines, punitive damages, the loss of your franchise and potentially criminal charges.

You would be smart to seek the advice of an attorney at the earliest moments after learning that you are facing accusations of violating your franchise agreement. A lawyer with experience in the nuances and complexities of franchise law may be a strong ally.