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Franchise Agreements, Part 1

According to the International Franchise Association, more than 700,000 Ohio jobs are directly or indirectly related to franchised businesses.  When our clients consider whether to launch or expand a franchise, our attorneys carefully review these and other provisions in franchise agreements:

  1. Does the franchise agreement necessitate revisions to your operating agreement? For example, it may require your limited liability company to have a certain number of officers or restrict the type of name.

  2. What initial fees are required? What recurring royalty fees will have to be paid?

  3. Typically, the agreement will require that the franchisee carry a minimum level of liability insurance. Does your LLC carry this amount of coverage?

  4. Franchise agreements frequently include noncompete clauses to discourage franchisees from operating a similar business nearby. For example, the contract might prevent a coffee franchisee from operating another coffeehouse within the same city during the term of the agreement and for 2 years thereafter. Are these time and geographic restrictions reasonable?

  5. Which employees are bound by confidentiality or nondisclosure agreements?

  6. When can the agreement be terminated? And if the agreement is breached, what are the required damages?

Although this list is not exhaustive, it may give you an idea of some important questions to consider before finalizing a franchise agreement.

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