Franchise Agreement Red Flags: What to Review Before Signing

Franchise agreements are among the most consequential contracts you may sign. They typically involve significant financial investment, long-term commitments, and complex obligations. Understanding the red flags can protect a substantial investment.

Critical Red Flags

• Excessive or hidden fees: Beyond the initial franchise fee, review royalty rates, marketing fund contributions, technology fees, required vendor purchases, and renewal fees. Calculate the total cost of ownership over the agreement term, not just the upfront investment.
• No protected territory: Some franchise agreements do not guarantee an exclusive territory, meaning the franchisor can open competing locations or sell online in your area. Without territorial protection, your investment may be undermined by the franchisor's own expansion.
• One-sided termination rights: Many franchise agreements give the franchisor broad termination rights while severely limiting yours. Review whether the franchisor can terminate for minor infractions, and whether you receive adequate notice and cure periods.
• Unrealistic financial projections: If the Franchise Disclosure Document (FDD) Item 19 contains financial performance representations, examine them critically. If there are no Item 19 disclosures, ask why. Projections that seem too good to investigate deserve the most investigation.
• Post-termination restrictions: Non-competes after franchise termination can prevent you from operating a similar business for years. Review the geographic scope, duration, and whether restrictions apply even if the franchisor terminates without cause.

Other Concerns

• Mandatory vendors at above-market prices: Required purchases from franchisor-approved vendors at inflated prices can significantly erode margins.
• Weak transfer rights: Difficulty transferring or selling your franchise limits your exit options. Review the franchisor's approval requirements and transfer fees.
• Unlimited personal guarantee: A personal guarantee that extends to your spouse or beyond the franchise debt deserves serious scrutiny.
• No franchisee association: A franchisor that discourages or prohibits franchisee communication may be hiding systemic issues.

When to Consult a Lawyer

Franchise law is specialized. Before signing a franchise agreement or paying any fees, consider hiring a franchise attorney to review the FDD and franchise agreement. The FTC's Franchise Rule requires disclosure, but it does not evaluate the fairness of the terms.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.