Common Legal Pitfalls When Starting a Franchise Business

Starting a franchise business can seem like a dream come true. You’re buying into a proven model with established brand recognition and a built-in support system. But while the benefits are real, the journey is not without its challenges. Many new franchisees dive in with excitement, only to discover unexpected legal pitfalls that can turn that dream into a headache.

Whether it’s navigating complex agreements, understanding fees, or dealing with the franchisor’s control, there are plenty of potential missteps that can trip you up. In this article, we’ll explore the most common legal pitfalls that new franchise owners face and how you can avoid them. With a little guidance and preparation, you can steer clear of trouble and focus on building a successful franchise business.

Pitfall 1: Not Understanding the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document (FDD) is one of the most critical documents you’ll encounter as a prospective franchisee. It outlines everything you need to know about the franchise, from fees and financial obligations to the franchisor’s legal history and your responsibilities. Yet, it’s not uncommon for new franchisees to skim through it without fully understanding the details.

The FDD is a hefty document, often over 100 pages, filled with legal jargon that can be hard to digest. But don’t be tempted to rush through it—this is the roadmap for your business!

Objection: “I don’t have the time or expertise to go through all that legal stuff.”Response: We get it! Reviewing the FDD can feel overwhelming, but that’s where we come in. Our law firm can help you interpret the FDD, highlight key sections, and explain exactly what you’re committing to. A little time now can save you from big headaches down the road.

Call to Action: Don’t face the FDD alone—contact our law firm today to make sure you know what you’re signing up for.

Pitfall 2: Underestimating Franchise Fees and Financial Commitments

Most franchisees know there’s an upfront cost to getting started, but what about ongoing fees? Many franchises require royalties, marketing fees, training costs, and more. These fees can add up quickly, affecting your bottom line and even your ability to turn a profit.

It’s essential to understand both the initial investment and the ongoing financial commitments before signing any agreement. Remember, a franchise is a long-term relationship, and these fees will be with you for the life of your business.

Pro Tip: Always create a detailed financial plan, factoring in these fees alongside your expected revenue. This will give you a realistic picture of what you can afford and help you avoid financial stress later on.

Pitfall 3: Not Knowing Your Territory Rights

Territory rights can be a tricky part of franchise agreements. These rights determine where you can operate and whether you’ll face competition from other franchisees of the same brand. Some franchises offer exclusive territories, while others don’t—meaning another franchisee could open up shop right next door.

Before you commit, it’s essential to understand the details of your territory rights and what kind of protection you’ll have. This aspect can greatly affect your customer base and revenue potential.

Objection: “But the franchisor said they wouldn’t open another location nearby.”Response: It’s important to get everything in writing. Verbal assurances don’t hold up if they’re not included in the franchise agreement. Our law firm can help you navigate these details and ensure you’re protected.

Call to Action: Reach out to us to clarify your territory rights and ensure you have the protection you need to succeed.

Pitfall 4: Overlooking the Franchisor’s Level of Control

When you buy a franchise, you’re not just buying a business; you’re entering into a partnership where the franchisor has significant control over your operations. From marketing strategies to product pricing and supplier choices, many aspects of your business may be dictated by the franchisor.

Some new franchisees are surprised by how much autonomy they give up. While the structure and support can be beneficial, it’s crucial to understand exactly how much control the franchisor will exert over your day-to-day operations.

Open Loop: How much control is too much? The answer depends on your comfort level and business goals. We can help you assess whether the franchisor’s level of control aligns with what you’re looking for in a business partnership.

Call to Action: Not sure if you’re comfortable with the level of control in your franchise agreement? Contact our law firm, and we’ll review the terms with you to make sure it’s the right fit.

Pitfall 5: Ignoring Restrictions on Selling or Exiting the Franchise

Many franchisees don’t think about selling or exiting their franchise when they’re just starting out. However, it’s essential to consider this from the beginning. Franchise agreements often include strict conditions on selling, transferring, or exiting the business, which could impact your ability to cash out or move on when the time comes.

Some agreements require you to sell back to the franchisor or even restrict who you can sell to. Understanding these terms now will help you plan for the future and avoid feeling trapped in a business you can’t easily exit.

Pro Tip: Always have an exit strategy, even if you’re planning to stay long-term. Knowing your options will give you peace of mind and flexibility as your business evolves.

Pitfall 6: Failing to Seek Legal Advice Before Signing

Perhaps the biggest mistake new franchisees make is failing to seek legal advice before signing the franchise agreement. Franchise agreements are complex and full of terms that could impact your rights and obligations. Without expert guidance, you might find yourself locked into terms that aren’t favorable or that you don’t fully understand.

Objection: “Isn’t hiring a lawyer expensive?”Response: Investing in legal guidance now can save you a fortune later. Think of it as an investment in your business’s future. Our law firm specializes in franchise law and can help you navigate the agreement, ensuring you’re protected from the start.

Call to Action: Don’t take risks with your future. Contact us today for a consultation, and let us guide you through the franchise process with confidence.

Avoiding Common Pitfalls: How We Can Help

Navigating the legal landscape of franchising doesn’t have to be overwhelming. With the right support, you can avoid these common pitfalls and set your franchise up for success. From reviewing the FDD to clarifying territory rights and evaluating fees, our law firm is here to help you every step of the way.

Starting a franchise is a big decision, and it’s essential to go in with a clear understanding of your rights and responsibilities. Reach out to our experienced legal team today for a consultation. Let us help you protect your investment, so you can focus on building a thriving business.

Mitchell C. Beinhaker, Esq. is a business lawyer and estates attorney who runs a solo legal & consulting practice representing business owners, entrepreneurs, executives, and professionals. Through his 30+ years of experience, Mitchell has handled business development, marketing, firm management, along with business transactional work for clients of the firm. He has extensive experience with corporate governance, commercial transactions, real estate, and risk analysis. Using his years of practical experience, he drafts contracts, negotiates purchases, and can manage outside counsel for any corporate situation. For business owners and executives, he creates and implements estate plans, along with succession plans to help companies continue for future generations.  

Mitchell is the co-author of 10 Ways to Get Sued by Anyone & Everyone:  the small business owners guide to staying out of court, available in paperback and kindle from Amazon.

If you are a non-participating provider and need help with your NSA arbitrations, contact our office for a free consultation.  You can email us at info@beinhakerlaw.com.  To learn more about Mitchell and his practice, visit beinhakerlaw.com.