How Can Franchisees Protect Their Business
Ideally, buying a franchise from a large parent company ought to be a friendly transaction because everyone wants the business to do well. However, when your life savings and all the loans you managed to get are at stake, you need to take steps to protect your interests.
Franchisers and franchisees have innate conflict of interests: Franchisers may be interested in the business’s top-line revenues, whereas franchisees are more interested in the bottom-line revenues.
Franchisers take their royalties from the gross revenue—and not the profit—of the franchise. As a result, franchisers are focused on coming up with strategies that improve the top-line revenues. Many franchisees claim that these strategies are sometimes detrimental to the cash flow of the franchisees.
For example, a food restaurant franchise may promote low-cost meals that hurt the profit margins of its franchisees. In such cases, franchisors often argue that this strategy leads to a higher volume that result in more revenue—an argument that doesn’t always hold.
A business lawyer with many years of experience and a long client list has likely seen many franchises succeed and, unfortunately, decline. They all agree that for a franchise to succeed, would-be franchisees should get legal advice from a franchise attorney in Austin, secure a favorable deal, research widely before committing to anything, and ask the difficult questions before entering an agreement. Don’t buy franchise only because you like the company’s products.
Here are five important tips from franchise attorneys in Austin, Texas.
Think Long-Term During Negotiations
Many would-be franchisees think they can operate the business forever as long as they meet the agreed upon performance standards. But, in reality, franchise agreements apply for a given period and need to be renegotiated. If you’re interested in continuing, you may have to settle for less favorable terms.
Prepare for a Sale
A franchisee may opt to sell at some point. Some companies may try to secure the right of first refusal. This means that the parent is given the first offer to purchase the business. A good Texas franchise business attorney will fight for an agreement that is free of this caveat, as it can diminish the potential sale value.
Have an Exit Strategy
A franchisee might want to sell the business if they lose money for several years. However, many franchise contracts don’t allow selling. Suing the parent company for the right to close the business can leave a franchisee liable for several years’ worth of future royalties. Find a Texas lawyer who may negotiate on early-out rights.
Defend Your Territory
Sometimes competition can come from the same brand in cases where two franchisees from the same parent company are each other’s main competition. With the right Austin, TX lawyer, you can secure an agreement that offers territorial protection. The protections don’t apply only to physical stores. For example, a parent company can encroach on its franchisee’s territory through online sales.
Establish a Support System
Some states have franchise laws which favor franchisees. However, the legal landscape is ever-evolving, as do franchise agreements. For this reason, professional associations that represent franchisees and dealers have multiplied in recent years. Franchise lawyers may recommend joining such associations where franchisees support each other. At the Lawyer Referral Service of Central Texas, we help you find experienced franchise and business attorneys that will be with you the whole way.