Every business owner needs an exit strategy. A franchisee is no exception. One of the differences between a traditional entrepreneur and a franchisee is that options for exiting the business are spelled out before the franchised is purchased.
Item #17 of the Franchise Disclosure Document covers ‘Renewal, Termination, Transfer and Dispute Resolution’ – a.k.a. your exit strategy. This is heavy stuff right here, so take a deep breath and get ready to take some notes.
What you’ll learn:
• Your terms for contract termination or renewal
• Dispute resolution methods
The list may seem short – but the details are not.
Why is this important?
Item #17 mostly reads like a chart, cross-referencing you to numerous sections of the franchise agreement as well as other Items of the FDD. Essentially, it’s a synopsis of your relationship with the franchisor with a ‘prenup’ thrown in for good measure. It will tell you – or direct you – to everything you need to know as it pertains to your rights as a franchisee.
Among others, Item #17 will likely re-direct you to Items #7, 9, 10 and 11. Each of these Items covers some aspect of your direct relationship with the franchise, detailing everything from your obligations as a franchisee to the franchisors commitments to you. In addition, Item #12 – covering your territory rights – will be mentioned because it contains critical details about the protection of your territory and when that protection may expire.
Confused yet? Don’t overthink it. Item #17 is simply a collection of the rules, regulations, policies and agreements relating to your relationship with the franchisor, when and how it expires, what your rights are, what their rights are and who can do what to whom. It will take some time to do all of the cross-referencing but I can’t stress enough the importance of doing this thoroughly.
What does this have to do with your exit strategy, you might be asking? Well, your exit strategy is woven right in to this tangled web of rules and regulations. Your franchisor will tell you when your franchise agreement ends, how you can renew it, stipulations on when it can be terminated early, and what they can modify when it comes time to renew your agreement with them.
In addition, the franchisor must provide a policy for dispute and conflict resolution. Even the most organized and systematic franchises will have occasional quarrels with their franchisees. It comes with the territory of doing business together. A good franchise model will include judicious rules for resolving conflicts that are neutral and fair to both the franchisor and the franchisee.
And, of course, we couldn’t end without giving you some things to look out for. First of all, be leery of a franchise that allows little breathing room when it comes to renewing your franchise agreement. For example, some franchises will only allow you to renew your franchise agreement if you consent to higher royalty fees or additional charges. As a loyal franchisee, it shouldn’t cost you more to stay in the club. You should look to be getting a deal the longer you stick with them.
Also, don’t sign anything that requires you to settle disputes through binding arbitration before consulting with a licensed attorney in your state. You’re essentially signing away your right to a trial by jury and should speak with a qualified franchise attorney before signing away any entitlements you have under the law. Along those same lines, don’t fall for a franchise that requires all disputes to be resolved in their hometown. This gives them an instant advantage and puts you at risk of being judged with bias.
The bottom line is that Item #17 is the be-all and end-all of your rights as a franchisee and their rights as a franchisor. This is the balance of power right here folks, so be sure you’re pairing up with a franchise that has your best interests in mind, not just theirs.
The end is in sight! With only six more Items to go, next week’s is a breeze – Item #18; celebrity power.
