Franchise not a guarantee of entrepreneurial success

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So, you want to start a business and you’ve determined that purchasing a franchise is right for you.

You’ve also found a concept that fits your lifestyle and you’ve talked with your lawyer and accountant about a development plan.

Guess what? You’re not done yet.

You’ve thought about everything to make things go right, but what if something goes wrong?

Franchisees need to know what will happen if the franchisor phases out a concept or a franchise, said Mark Meyer, an attorney at Rothgerber Johnson & Lyons LLP,  and they must understand and limit a franchisor’s termination rights, “so you can’t be up and running and suddenly be terminated.”

Many franchise contracts also have a noncompete clause, within a geographical area, for products and proprietary information. So, when a franchisee wants to terminate, “they can’t just change the sign and keep doing business,” Meyer said.

Another aspect to consider is a multi-unit system, in which a franchisee takes a territory or region and develops a certain number of units.

“Make sure the territory is exclusive,” Meyer said. “A carve-out means a franchisor can compete with you in that region.”

For instance, the Haagen Dazs franchisor used to have a carve-out and supplied products to grocery stores, which eventually sold more than the franchisee ice cream boutiques.

The flip side of that is a franchisee’s territory rights.

“If you sell your product in a restaurant, can you market outside the restaurant? Can you cater outside?” Meyer said. “Also make sure there is sufficient time to develop the units you are committed to opening.”

Some franchisors will take the territory away if units don’t open as scheduled.

Multi-units franchisees also should be segregated as far as liability goes.

“If someone slips and falls in one store and they sue you — all five stores can go down,” Meyer said.