These are Often Overlooked, in Franchise Agreements

So you’re buying a franchise, and the franchisor has put in front of you a lengthy franchise agreement. You’re a pretty savvy businessperson, so you generally know what to look for, and how to read the franchise agreement.

But there are some things in every franchise agreement that even the most experienced business people overlook.

Intellectual Property

One major reason you’re buying a franchise instead of just starting your own business, is that you are able to use a name, brand, logo, and other designating symbols, all which already have recognition to the general public. Put simply, you don’t have to build a brand—it’s there for you.

But is it? If the name, logo, and other distinguishing features of the franchise aren’t actually registered trademarks, then you actually have no protection at all. There’s nothing stopping any competitor from using you or your franchisee’s distinctive colors, designs, or sayings.

Many small franchises will say that they aren’t yet trademarked, but that you have a chance to get in “on the ground floor.” But if you wanted to do that, why buy a franchise in the first place?

What’s the Real Fee?

Sure, the franchise fee is there, disclosed to you, usually as a percentage of gross profits (so yes, their fee, although it looks small–say, 3 or 4%–often comes off the top of your gross sales, making that number a significant expense).

But look closely: is that percentage really all your paying? In many cases, the answer is no.

Many franchises have startup fees. These aren’t costs to actually start the business, they are just a flat fee. Whatever you’re paying needs to be divided by the number of months you would anticipate having the business, and calculated as a monthly cost, even though you’re paying it up front, all at once.

So, let’s say you anticipate having the franchise 20 years. That’s 240 months. If your startup fee was $100,000, that’s an extra $416 per month you’re not getting.

Many franchises also charge you advertising costs. Sure, you’re getting something out of that—advertising—but it’s still a fee or a cost.

And when you add these fees and costs together, you may find that much more of your net profit is being given to the franchisor than you think it is.

Location Matters

Many large locations know better than to compete against themselves by selling franchises that are so close, they cannibalize each other. But smaller businesses just want stores or franchisees, and the more the better, from their end. They don’t really care how many are in the same geographic area, or if you go out of business.

For businesses where this is an issue, you need to ask whether there is a restriction on the placement of other franchisees, and whether that restriction is one you’re comfortable with.

Buying or selling a franchise? Let us help you.  Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today.

Sources:

uspto.gov/trademarks/search

msaworldwide.com/blog/franchise-fees-the-basics/#:~:text=The%20Franchise%20Fee%20(also%20called,upon%20signing%20the%20Franchise%20Agreement