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Franchise Provisions to Avoid in San Diego

Are you thinking of buying a franchise? We here at San Diego Corporate Law have noticed a strong uptick in franchise companies advertising for new franchisees. Starting up a new business can be exciting and we certainly encourage the entrepreneurial spirit. We have years of experience helping San Diego residents buy franchises and businesses. Franchising is almost entirely contract-based. We have the skills and dedication to help read and review those contracts and can provide you with the advice and counsel you need. We also know what to avoid. In this article, we list a few franchise provisions to avoid.

San Diego Corporate Law: What is a Franchise?

As many know, when you become a franchisee, you agree to pay a “franchise fee” and you are allowed/required to use the franchisor’s business methods, logos, and trademarks and to sell their products/services. Many fast food restaurants are franchises, but recent growth in the franchise marketplace has been in the service sector (such as healthcare).

San Diego Corporate Law: Some Franchise Contract Provisions to Avoid

Franchising has been generally successful in the US because franchises “work”; that is, both the parent franchisor benefits by being able to expand its market share and the franchisee benefits by being able to start and run a business and make a living. However, some franchisors can be quite aggressive and, frankly, self-serving. The franchise agreements are written by the franchisor and those agreements are written for the benefits of the franchisor, not the franchisee. That is why you need a good San Diego franchise attorney to review the agreements. Here are pro-franchisor provisions that should be avoided:

Excessive Exclusive Purchase Clauses

Many franchise agreements have what might be called “normal” exclusive purchase clauses. The franchisor makes money from the franchise fee, but most of the money is made by selling you the product or the support services. So, if you are a restaurant, for example, the franchisee is generally required to buy the food from the franchisor. And, in general, the price is somewhat higher than if you went searching for good deals at your local grocery store.

These kinds of exclusive purchase clauses are standard and expected. However, sometimes franchisors insist upon including EVERYTHING in the exclusive purchase clauses like paper clips, office paper, computers, furniture, and on and on. It is better to walk away than to agree to such a provision. You will become increasingly frustrated over the months and years when you have to spend $3 for a box of staples when they were a dollar at the local office supply store. Or you will start “cheating.” Neither is good.

Excessively Expensive Exclusive Purchase Clauses

In the same vein, you should pay close attention to the prices that will be charged for the product and support services that are to be provided. The franchise agreement should have some limit to what the franchisor can charge. If not, it may be better to walk away.

Liquidated Damages Clauses

In general, a liquidated damages clause allows the franchisor to collect in court a sum of money that is predetermined to be the franchisor’s “damages” if you breach the franchise agreement. In general, liquidated damage clauses are one-sided, heavy-handed, and suggest that the franchisor is acting in bad faith. If the franchisor is being one-sided and heavy-handed in the initial franchise agreement, there is reason to believe that the franchisor will behave in that manner in day-to-day dealings. It may be better to walk away.

Mandatory Arbitration Clauses

Forced arbitration is also another one-sided, heavy-handed tactic. It may be better to walk away.

Aggressive Limitation on Liability and Indemnification Clauses

Standard clauses of these types are normal. Essentially, the franchisor asks that, if there is some lawsuit or problem caused by you, the franchisee, then the franchisor has limited liability and you will cover the costs and legal fees of any lawsuit, etc. Normally, there is a corresponding set of provisions that protect the franchisee. However, sometimes a franchise agreement is one-sided and aggressive with respect to these clauses; essentially, the franchisor seeks to shift all the legal risk onto the franchisee. This is another example of one-sided, heavy-handed behavior that does not bode well for the day-to-day relationship. Better to walk away.

Contact San Diego Corporate Law Today

Buying a franchise is not a simple endeavor. You need the advice and guidance of an experienced business attorney like Michael Leonard, Esq. of San Diego Corporate Law. Aside from helping with the franchise agreement, Mr. Leonard can help you understand the disclosures that must be provided by the franchisor. There are many laws that regulate franchises here in California. For example, there is California franchisee “bill of rights.” So, as said, if you are thinking about buying a franchise, you need an attorney skilled in franchising law. If you want more information, contact Mr. Leonard via email or by calling (858) 483-9200.