Recently I received some interesting and insightful comments from an individual commenting on issues involving franchisee rights. Her main point of contention appears to be the disparity of bargaining power and legal rights between franchisors and franchisees. While this is certainly an issue of concern, I believe that her comments may be giving a free pass to franchisees who don’t take the time to conduct the appropriate pre-purchase franchise due diligence. The following are some of the commentators insightful points:
On Franchise Agreement Liquidated Damages:
Isn’t it true that most franchisees don’t understand that the optional liquidated damages terms in the contract are premeditated to give the franchisor the advantage when the franchisee fails to thrive? The failure fee is hidden within the contract from the view of franchisees.
Do Attorneys Point this Failure Fee Out to Their Clients?
My Take on this Serious Issue: As I have previously discussed, liquidated damage provisions in franchise agreements – especially those that kick-in when a franchisee closes his or her doors have the potential to inflict serious financial harm on a franchisee who already may have lost a substantial investment. However, these provisions may be negotiated by franchise attorneys and are exactly the types of legal issues that a franchisee should be discussing with a franchise attorney before signing a franchise agreement. Liquidated damage clauses can be negotiated.
On Franchisees Reading and Negotiating their Franchise Agreement:
While it may be true that franchise agreements may be legally negotiated with the franchisor by individual prospective franchisees, isn’t it true that most of the mature franchisors don’t or won’t negotiate changes and will acknowledge that pre-sale, their contracts are not negotiable. Don’t they acknowledge this to the courts, when asked?
My Take on this Serious Issue: Franchise agreements are negotiable and even mature franchisors are willing to make reasonable modifications. However, even if we assume that a particular franchisor will not make changes why would a prospective franchisee invest his or her livelihood in a franchise and sign a franchise agreement without first reviewing, understanding and evaluating each and every right and obligation contained in the franchise agreement. Look, there are many times where I believe that franchisees need an advocate but franchisees cannot get a free pass when they neglect to conduct even the most basic due diligence.
In the end, you do not have to sign a franchise agreement and, sometimes, even with successful franchise systems, not signing the agreement might be the best course of action for you. No one is forcing you to sign the agreement. Likewise you must know that no matter how many other franchisees may have signed the franchise agreement you – personally – must understand and evaluate what you are signing. Your livelihood depends on it.
For franchisors, a policy that permits limited but targeted franchise agreement modifications may actually strengthen the enforceability of your franchise agreements when faced with litigation.