Are Franchise Agreements Really One-Sided?

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Are Franchise Agreements Really One-Sided?
Are Franchise Agreements Really One-Sided?
The other side of the one-sided coin.

So you've been researching franchises and feel like after much due diligence you found the right fit. Inevitably, and usually as one of the last parts of the process, you begin to drill down into a serious review of the Franchise Agreement. As you review, you start to realize that this document is written from what appears to be a very one-sided perspective in favor of the franchisor. In addition, the franchisor has probably told you something to the effect that "it is what it is" and that the document doesn't change. Understandably, you suddenly feel a deep sense of uneasiness.

While it is true that the Franchise Agreement is written by the franchisor, and usually in favor of granting the franchisor significant rights that most likely will not change, allow me to give an analogy that might help put it in a different perspective. This analogy is one that most of us can relate to and involves Homeowner Association (HOA) agreements.

Many of us have had the experience of hunting for our perfect home. We investigate areas and decide which neighborhoods we want to target. We then tour multiple homes and find that one home we feel is going to be just the right fit. The excitement and anticipation build and we contemplate an offer. Then, we are presented with the dreaded Homeowners Association Agreement. As we review the agreement, we realize that it is very one-sided. For the most part it lays out all the things we cannot do to our own home and the legal remedies that can be taken against us if we fail to comply. Naturally, we begin to question if this is the right move. Few people feel good about signing an HOA agreement at the beginning.

You pull the trigger anyway because everything else about the house, the neighborhood, and the area, meets your criteria. You move into your new home and a few months later return from work to find that your next door neighbor has painted his house a putrid purple color! You are horrified! You immediately think of your future house guests coming over and commenting on your colorful neighbor's house. Worse, you think about what that means for the investment into your house. Sure you don't plan to move anytime soon, but if you do move, who is going to want to buy your house next to such an ugly monstrosity?

Then you remember your HOA agreement. You pull it out to review and, sure enough, you find a restriction on what colors a homeowner can paint their house. You contact your HOA representative and thankfully the oddball neighbor is forced to bring their house in line with the HOA agreement. 

The document you were dreading before you bought your house has suddenly become a godsend for you. The items that felt nitpicky when you originally reviewed the document, like making sure your lawn is mowed regularly and that your trash cans are put away quickly, don't seem so nitpicky when you begin to appreciate the collective benefit these "rules" have on the image of the neighborhood and the resale value of the homes within.

This is the same thing that happens in the Franchise Agreement. Franchisors are going to do what they need to in order to maintain the integrity of the brand and this is to the benefit of the entire franchisee network. If another franchisee is conducting business in a manner that is destructive to the brand, this will most likely have serious consequences on your business and you will ultimately be glad that the Franchise Agreement you were initially wary about is being enforced to bring other franchisees into compliance. Certainly, in this way, a strong Franchise Agreement that has "teeth" is really protecting your investment.

Almost all Franchise Agreements are going to contain items that may cause you some uneasiness, so here are a couple of questions to consider. First, have you been able to verify that the franchisor maintains an overall positive and productive relationship with its franchisees? You should be able to determine that the franchisor is fair and reasonable in their dealings, that they follow through and provide the support they claim and that they are committed to the franchisee's success. In short, you should validate that the franchisor really cares about you and not just about collecting a royalty.

Second, does the franchisor live its core values? If you find what you believe is going to be that right franchise opportunity and your values align with the franchisor's, then verify that the franchisor "walks the walk" and maintains its strong culture through adherence to their core values.

These are items that are best verified through meeting with the leadership team, as well as talking with the franchisees in the network. While doing your validation with franchisees you might be inclined to focus your conversation on the potential returns (as you should), but do not neglect to ask the franchisee these important questions and how they came to term and found the confidence to sign the Franchise Agreement. Much like the homeowners in the neighborhood with the daunting HOA agreement, the franchisees you talk with have already moved into the "neighborhood" and have made peace with the Franchise Agreement. In doing so, you will learn how they got past their concerns and you may even learn how the "one-sided" document has helped protect their business investment over time.


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