When Buying a Franchise you Must Give Serious Thought to "Restrictive Covenants"

When buying a franchise, justifiably, you prospective franchisee give serious thought to "upfront" costs and obligations such as (a) the initial franchise fee, (b) start-up costs, and (c) royalties (just three of many due diligence factors to consider).  However when evaluating your obligations as a prospective franchisee you must give consideration to and discuss with your franchise lawyer the types of "post termination restrictive covants" that you may be obligating yourself to.

That is, the typical franchise agreement will include "restrictive covenants" that will prohibit you from operating and/or engaging in certain types of business if and when your franchise agreement is terminated.  If you are currently involved in a "line of business" similar to the new franchise that you are purchasing this issue may be even more important since you may be subjecting yourself that "post-termination restrictions" that may prevent you from engaging in a line of business that you have participated in (and based your livelihood on) long before your purchase of any franchise.

Finding the Right Franchise

One of the most difficult and critical tasks for prospective franchisees is finding the right franchise opportunity.  This is not an easy task and requires an analysis and evaluation of many factors.  While no franchise opportunity is "perfect", over at the excellent Franchise King Blog franchise consultant Joel Libava offers franchisees some great insight into the qualities of the "perfect franchise".  According to Mr. Libava the "perfect franchise" should offer the following:

• Major Brand Power;
• Constant Innovation from Management;
• Uniformity;
• Solid Training Program;
• Extremely profitable franchisees; and 
• An engaged [utilization] of Social Media

For the prospective franchisee, when evaluating a franchise opportunity give serious and thorough consideration to these factors. Ask questions and make sure that your evaluation goes beyond (well beyond) the franchisors sales literature.  For some additional information on selecting a franchise and "franchise due diligence" definitely check out the Franchise King Blog and the "Franchisee Due Diligence" section of the New York Franchise Law Blog

Franchise Agreements, Franchisee Rights and the Introduction of "National Accounts" in a Franchise System

As service and product based franchise systems (such as home repair, computer support and ink suppliers) develop and expand their franchise base across the nation, issues arises as to a franchisors procurement of "national accounts" and how the terms of any agreed upon "national contract" will affect the revenues and profitability of franchisees.

In a recent article on this topic, "Franchisees Balk at Handyman Plan", Wall Street Journal columnist Richard Gibson discusses Mr. Handyman International, LLC's negotiation and introduction of a national service account contract with Wyndham Hotel Group. Mr. Handyman International, LLC, as franchisor, is negotiating and implementing a contract providing for repair services to be provided by its franchisees to certain hotel properties of Wyndham Hotel Group.  

For franchisees the introduction of a national accounts may represent added revenue and profit opportunities.  However, the "devil is in the details" and the terms of any "national contract" must be closely examined by franchisees.  Some important factors for franchisees to consider, include:

• Does the existing franchise agreement "carve out" national accounts from the franchisees "protected territory";
• How will national accounts located within a particular franchisees territory be services;
• Does the "national account contract" fix fees and are the agreed upon fees profitable for franchisees;
• Does the franchisor require a higher royalty on fees generated from "national accounts";
• Will franchisees be required to "bid" on servicing national accounts;
• What fees will the franchisor charge for managing national accounts.