Franchise agreements are detailed, legally binding contracts that can shape the future of your business. But many franchisees make costly mistakes that could easily be avoided. Here are the most common pitfalls—and how to steer clear of them.
1. Not Reading the Agreement Thoroughly
Many franchisees skim or skip key sections of the agreement, leading to surprises down the line.
Avoid it:
- Read every page—don’t rely on summaries or verbal explanations.
- Take notes on anything unclear or concerning.
- Ask for clarification on vague or complex terms.
- Consult a franchise lawyer before signing.
2. Failing to Understand Financial Obligations
Franchise fees go beyond the initial investment—there are ongoing costs that can add up fast.
Avoid it:
- Identify all one-time and recurring fees (royalties, marketing fund contributions, tech fees, etc.).
- Review your break-even and profit timelines carefully.
- Confirm any mandatory purchases (equipment, inventory, software).
- Ask for realistic financial projections, ideally from current franchisees.
3. Assuming Terms Are Negotiable When They Aren’t (or Vice Versa)
Some clauses might be non-negotiable, while others are more flexible than they seem.
Avoid it:
- Don’t assume anything—always ask about negotiability.
- Know which areas are typically set in stone (e.g., brand standards).
- Focus negotiations on key areas like territory, fees, or exit clauses.
- Get all negotiated changes in writing.
4. Overlooking Territory Clauses
Not understanding your geographic rights can lead to unexpected competition or missed opportunities.
Avoid it:
- Confirm whether your territory is exclusive or shared.
- Ask if online sales count toward territorial protection.
- Check if nearby company-owned or franchise locations are allowed.
- Understand what happens if you want to expand.
5. Ignoring Renewal and Termination Conditions
Franchise agreements often include strict rules about how and when you can renew or exit.
Avoid it:
- Know the length of the agreement and renewal terms.
- Understand what triggers termination (voluntary and involuntary).
- Check for non-compete clauses that affect your post-franchise options.
- Review your obligations if you decide to sell the franchise.
6. Underestimating the Franchisor’s Control
Many franchisees don’t realize how tightly franchisors manage daily operations.
Avoid it:
- Know what’s standardized (menu, hours, pricing, marketing, etc.).
- Expect regular inspections and compliance checks.
- Ask about flexibility for local market adaptation.
- Evaluate whether you’re comfortable with this level of oversight.
7. Not Getting Legal Advice
Trying to save money by skipping legal review often results in expensive mistakes later.
Avoid it:
- Hire a franchise-experienced attorney—general business lawyers may miss key nuances.
- Have them explain complex clauses in plain English.
- Let them guide you on what’s fair, what’s risky, and what’s negotiable.
- Use their advice to strengthen your position in negotiations.
Final Thoughts
Franchise agreements are the foundation of your business relationship. Take them seriously, review them thoroughly, and get expert help where needed. Doing so will put you in a strong position for long-term success.