Minneapolis franchisee lawyer Ron Gardner describes the biggest legal risks in buying a franchise.
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The biggest legal risk when you’re looking at buying a franchise actually come in a combination, in my opinion, of different provisions of the typical franchise agreement these days. Looking at these provisions individually, they might not mean anything and they might not be risky individually but when put together they create a real trap for perspective franchisees. There are three of them, those three are that there is a non-compete, so that if this doesn’t work out you can’t do anything with the money that you’ve spent or the education that you’ve learned or the asset that you’ve required, the building. A provision that doesn’t allow you to terminate for any reason at all and so that if you terminate the agreement because you’re losing money you’re deemed to be in breach of that agreement. And then there is a provision in a lot of franchise agreements these days that are called, it’s called a provision for future lost royalties. Which means if you close your franchise, let’s say you’re losing everything, you’re losing hundreds of thousands of dollars a month, if you close your franchise now you’ve breached the contract because you’ve stopped. You can’t do anything with the building because there’s a non-compete and the future lost royalties provision means that a franchisor is entitled to sue you for all of the money that they would have collected from you over the remaining term of the franchise. So if you’ve signed a 20-year franchise agreement and in year four you just say I can’t do this anymore, you lose everything and are potentially exposed to 16 more years of payments to the franchisor or an equivalent value of that. So those three things together are extraordinarily scary and they’re becoming quite typical in most franchise agreements today, so people really need to know where those traps are.