What if it Doesn’t Work Out?

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Jason Power - Shelton and Power

Benjamin Franklin once said “In this world nothing can be said to be certain, except death and taxes.”

This quote, in a way, speaks volumes to all who hear it, but it can also be interpreted for franchise owners as well. The only certainties for franchise owners are that they will one day leave the franchise system and they will have to pay fees to the franchisor, i.e. death and taxes.

The life of a franchise owners can be a very lucrative one. As with any lifestyle choice, the decision to be an entrepreneur has its ups and downs. There are the highs of being your own boss and making important decisions that impact the profitability of your business and paving your own way; but at the same time there are the downs where paying the franchisor a royalty and marketing fees are a necessary evil and making sure you are following someone else’s procedures is a must to avoid losing everything, not to mention the finite time you have with the franchise system.

So, when push comes to shove, the life of a franchisee is very uncertain because termination, expiration, or selling out are the only options really available. This article is not intended for whose lifetime franchisees, but is instead intended for that franchisee who starts the process of buying and decides, either through buyer’s remorse or by circumstances, to back out or that franchisee who opens for business and just can’t cut it. For those of you who fit this model, we feel for you.

Franchisors are becoming increasingly picky about who they award franchises to. The reason for this is because they want to assure as much certainty as possible in the longevity of their franchisees and their franchise system. Franchisors do not want a high turnover rate because that results in a bad reputation for them as well as higher costs to train new franchisees. When a new franchisee signs on, the franchisor is spending a lot of time and money to analyze and train that person; so what happens when that franchisee pulls the plug?

In most franchise agreements there are refunds available to franchisees who back out of the franchise purchase early on. Many of those franchisors who offer refunds will do so only under special circumstances such as if the franchisee fails training or cannot find a suitable location.

Other franchisors, however, will give a partial refund under any circumstance as long as the franchise agreement is terminated before certain timelines have been met.

Very few franchisors, if any, will give a 100 percent refund because of their costs to bring the franchisee on board which can include legal costs, staffing costs, printing costs, etc. associated with that franchisee. The best thing to do if you feel the franchise going sour early on is to bring it to the franchisor’s attention immediately to discuss a friendly separation.

When you are preparing to separate from the franchise whether it be the day after signing the franchise agreement or eight years in, you must understand that you will have ongoing obligations. Once you sign your name to the franchise agreement or any preliminary agreement with the franchisor, you are obligating yourself to confidentiality and non-competition agreements, among others. The reason for these obligations is that when you sign the franchise agreement or preliminary agreement, the franchisor will start providing you with information that is special to that franchise system. The franchisor does not want this special information used against them, so you will be required to agree to various restrictions if you want to separate from the franchise.

Sometimes these restrictions can be negotiated and reduced to allow you to seek employment in the same field, but you can be positive that you will have some restrictions imposed against you from using the knowledge acquired in competition against the franchise system.

If the franchise does not work out, and you decide to leave, then you should begin discussions with the franchisor and a third party adviser, such as a franchisee attorney, immediately to discuss your best position and options. If the decision is because the franchisor has not been living up to their end of the franchise agreement then you should discuss your decision to terminate with a franchisee attorney who may be able to negotiate with the franchisor to return a larger portion of your investment and possibly negotiate a reduction or waiver of your confidentiality and on-competition restrictions.

Before you decide to terminate the franchise agreement, regardless of whether it is early on or several years in, you should discuss your reasons with a trusted adviser so you can properly document those reasons which can help your position when negotiating your exit.

As was said in the beginning of this article, “In this world nothing can be said to be certain, except death and taxes.”

Your franchise ownership should be one of the best decisions you ever make and should be designed to help you reach your goals throughout life, but when purchasing your franchise do so with the knowledge that, like in all facets of life, there is no certainty of success or longevity.

Jason Power is a senior attorney with Shelton & Power franchise law firm. Jason has been helping entrepreneurs review and negotiate franchise purchases since 2009 and is a regular speaker at the International Franchise Expo, West Coast Franchise Expo, Franchise Expo South and various other franchise expos where he gives tips on how to analyze and negotiate a franchise purchase.

For more information visit: www.sheltonpower.com