Most people looking for a franchise understand that there will be restrictions imposed by a franchisor on how the business is operated. This can range from a retail store having to purchase products from certain suppliers to a restaurant needing to prepare its burgers in a very specific way. However, some people are surprised to learn that these restrictions can extend beyond the running of the day-to-day business and impact them personally.
Here are some examples of the types of personal restrictions to expect in a franchise agreement:
- “Best Efforts” – In some franchise agreements, the franchisor will require the person acquiring the franchise to devote their full time and attention to running their franchise. As a result, someone who wants to continue working at their current job or spend part of the winter in Florida may have to change these plans if they do not realize there is a best efforts expectation from the franchisor. If this is a concern, discussing the situation with the franchisor before finalizing the franchise agreement is a good idea. The franchisor may be willing to remove this provision or allow for an alternative approach, such as a manager being hired to take on some of the responsibilities normally handled by the person acquiring the franchise location.
- Selling the franchise location – Sometimes a franchise is not a good fit and the franchisee may want to sell its location to someone else while there are still years remaining on the term of the franchise agreement. Unfortunately, the franchisor has to approve of any sale, which can restrict someone’s ability to quickly dispose of their location. While the franchisor will often be able to make their decision on the approval in their sole and absolute discretion, franchise agreements usually have explicit requirements to be fulfilled as well, such as the proposed franchisee agreeing to be bound by the franchise agreement and providing financial information to confirm they have the means to operate the franchise location. Furthermore, franchise agreements may require that a franchise transfer fee be paid or that the franchisor is entitled to any profit arising from the sale. Based on these complications, a franchisee should, if possible, try to limit the number of requirements imposed by the franchisor in the event of a sale.
- Non-competition and non-solicitation – Both during the term of the franchise agreement and after it has come to an end, there are often provisions restricting current and former franchisees from competing with the franchisor. For example, a franchise that sells Mexican food would likely have language in their franchise agreement preventing a franchisee from opening and operating another Mexican restaurant within a certain distance of any of its locations (as well as within a certain time period after the franchise agreement was terminated). A Franchisor will also restrict a franchisee’s ability to take employees or customers with them to another location or to use “secrets” of their business model (e.g. for a restaurant, the franchisee cannot use their recipes or other confidential information). Therefore, a franchisee needs to be careful they are not only complying with these requirements during the term of the franchise agreement, but after it has concluded as well.
These issues highlight the importance reviewing the franchise agreement in detail at the beginning of the process to ensure that a franchisee can comply with the requirements imposed by the franchisor. Otherwise, someone’s plan to retire early or open a new location will likely need to be put on hold.
This blog post was written by Jason Peyman, a member of the Real Estate and Business Law teams. He can be reached at 613-369-0376 or at jason.peyman@mannlawyers.com.
