THE NEED TO READ YOUR FRANCHISE AGREEMENT

Franchisees who don’t take the time to understand their obligations are storing up trouble, says Jason Gehrke

Over the years, I’ve taken a great number of calls at the Franchise Advisory Centre which have all asked essentially the same question: ‘My franchisor wants me to do/stop doing/change/upgrade/divest something. Can they make me do that?’

Unfortunately for the enquirer, the answer is almost always the same: Read your franchise agreement. The answer will be in there.

After reading the franchise agreement, most franchisees find that the franchisor does have the authority to require a franchisee to do/stop doing /change/upgrade/divest something. Strangely, learning this can sometimes come as a shock. Conversations between franchisees and franchisors afterwards might go something like this:

Franchisee: I didn’t agree to this.

Franchisor: Well, actually you did. It’s in the agreement you signed.

Franchisee: Yes, but there’s a lot of stuff in the agreement. You can’t possibly expect a franchisee to read and understand it all.

Franchisor: But you also got professional advice from a lawyer before you signed the agreement.

Franchisee: Yes, but that was all in legalese and only because you wouldn’t grant the franchise if I didn’t get advice. I didn’t realise I would still need to do/stop doing/change/upgrade or divest something now –not after being in the system all this time!

At the end of such a conversation comes the awkward moment where the franchisor wishes the franchisee would just get on with it, and the franchisee is clearly reluctant to get on with it because they feel that, irrespective of what’s in the agreement, they haven’t tacitly agreed to do or stop doing whatever it is that was at the heart of the issue in the first place.

Despite the apparent contractual obligation of the franchisee to follow the agreement, the franchisee then often changes tack and questions why they need to do or stop doing something, thus forcing the franchisor to rationalise (possibly for the umpteenth time) why the outcome is needed.

The End Of A Beautiful Friendship

During these exchanges, frustrations can quickly build up on both sides. In the process, the franchisee’s respect and regard for the franchisor is diluted, and the franchisor often becomes more determined than ever to force the franchisee to do as they are told. It may culminate in the franchisor sending the franchisee a breach letter putting them on notice that unless they comply they may have their franchise terminated.

Once threatened with the prospect of termination, a hitherto happy and productive relationship can be changed for ever. The franchisee sees red, the situation is inflamed, and nobody lives happily ever after.

The Ultimate Pre-Nup

Of course, both sides could (and often do) conduct themselves better in these situations than in the scenario above, but the point remains that the franchise agreement gives the franchisor significant scope to require certain things of a franchisee during the term of the franchise and, more often than not, franchisees are not fully aware of this at the outset or have forgotten about it by the time the issue actually arises.

The most common reason for this is that many franchisees simply do not read their franchise agreements before they commit to the franchise or, even if they do read the agreement, they do not understand or retain its key details and obligations. Given the importance of the document, that’s a huge problem. You’ll sometimes hear people say, ‘Franchising is like a marriage between franchisee and franchisor.’ Well, if that’s true, franchise agreements are the ultimate pre-nuptial contract. Everything that happens in your married life (and, indeed, how things will be settled if the marriage ends) is taken into account in a comprehensive pre-nuptial agreement. Franchise agreements are no different – if anything, they are even more comprehensive than prenuptial agreements.

So Why Don’t Franchisees Read Them?

The decision to become your own boss, and the process of searching for the right business, is an emotional journey fraught with highs and lows. When a franchisee finds ‘the one’, the rational analysis of the decision can be compromised by the excitement and emotion of the prospect of finally taking control of your own destiny. Psychologists can make of this what they will, but the decision to buy a business has few parallels in many people’s lives.

The nearest comparison in terms of major life-changing decisions might be the decision to get married or the decision to buy a home. While a certain rationality may exist in both of these decisions, choosing spouses and homes are effectively emotional decisions and if these are the only frames of reference franchisees have, it is highly probable they will approach the decision to buy a franchise in a similar way.

In other words, they will choose a particular franchise because they like it, and then will rationalise everything else to fit the decision.

This means that when the time comes for the franchisor to provide the franchise agreement and disclosure documentation, a potential franchisee may already be wedded to the idea of buying the franchise. The advice they seek (if any) will be to validate their decision, not repudiate it. They will focus on the elements that attracted them in the first place, and often not consider or simply discount anything that doesn’t fit their decision – including the franchise agreement.

You still need advice

Once the decision to buy the franchise has been made, a franchisee can view the signing of the franchise agreement as a necessary formality to be tolerated, and the obtaining of advice about the agreement as an inconvenient cost and delay to be endured. This is hardly a mindset that lends itself to robust examination of the contents and implications of the franchise agreement.

The result of an emotionally-driven decision to buy a franchise is that the finer details are overlooked at the outset and only come to the fore as time and circumstance progress, leading ultimately to the sort of conversations outlined above.

How To Avoid Nasty Surprises

Of course there are a great many franchisees who do read their documents in full prior to buying a franchise and develop a complete understanding of their obligations under the franchise agreement before proceeding, but there remain many more who do not.

For those who fail to give the agreement proper attention before signing and are emotionally-driven in their buying process, life as a franchisee will sometimes include some unexpected (and not always pleasant) surprises.

To avoid such surprises, every franchisee should always read everything related to the business (and get professional advice) before committing to buy a franchise. They should also get professional advice from franchiseexperienced professionals, particularly lawyers and accountants (see page 72). Franchise agreements are not exactly light bedtime reading, so it pays to get someone who understands the implications and obligations they contain to go through them and explain them. That way, the chances of unnecessary future conflict can be reduced and both franchisor and franchisee will be able to get on with building successful businesses based upon mutual understanding.

About the Author

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for over 30 years at franchisee, franchisor and advisor level. He conducts online franchise education programmes and publishes Franchise News & Events, a fortnightly mail bulletin on franchising issues.