BUYING A FRANCHISE – BEWARE OF FREEDOM OF CONTRACT
Sept. 29, 2017
When buying a franchise, you should beware of “freedom of contract”. Freedom of contract is a bedrock concept of the legal system. It presumes that every person understands every word of every contract and that their “self-interest” will cause them to not sign unfair or ill-advised contracts.
Franchisors spend tens of thousands of dollars getting contracts written that protect their interests. Franchise sales people routinely try to discourage prospective franchisees from consulting an attorney by saying, among other things, “we won’t change the contract anyway”. It works to their advantage if you sign the agreement and they are indifferent as to whether you understand it or even if you read it.
Fast forward a few years to a dispute. You are in arbitration or litigation with the franchisor and the franchisor’s attorney will ask you in a deposition “did anyone hold a gun to your head and make you sign the contract?” Of course you will truthfully answer “no” and the complexity of your case-and your ability to win a dispute is compromised. Every franchisor and every franchisor lawyer understands reality-that most prospective franchisees are emotionally attached to the franchise or the franchise sales person and willing, in the heat of the moment, to agree to anything just to get the “opportunity” to become a franchisee. It is not unlike teenagers who often make bad, even life-altering decisions in the heat of emotion.
Your best, and only, protection when you are considering buying a franchise is to understand and embrace the concept of “freedom of contract”. In truth, it is only you that can really protect your own self-interest. Many times, your self-interest will compel not signing a contract. To get to a good decision, you need to remove yourself from the emotional attachments. You need to clearly understand the contract-the entire contract. You need to understand the context and the nature of the franchisor-franchisee relationship. The first practical step is to read the Franchise Disclosure Document (FDD), the franchise agreement, and all the other documents that are part of the FDD. Read for understanding, not for confirmation of your beliefs. Write down or mark all of the provisions that you do not clearly understand.
After you have read the document carefully, then contact an experienced franchisee lawyer. Expect a thorough review and consultation to cost you some money-possibly a few thousand dollars. Listen to what the lawyer tells you about the documents and the nature of the relationship. If there is even one “red flag” area in the proposed deal, you should very carefully consider whether you should take the action the law presumes you will take to protect your self-interest-walk away unless the franchisor will change the offending provision. Do not rationalize. You are the best person to protect you and your family and your hard-earned money. When buying a franchise, beware of freedom of contract, unless you embrace it in which case it can save your investment.