Franchise is a practice of the right to run a Company’s business system and brand for a certain period of time. Therefore, when concluding franchise agreements, parties should be aware of “deal breakers” provisions such as liquidated damages clauses, insufficient start-up support, and mandatory arbitration clauses. Franchisors provide many advantages for ambitious Franchisees to start a business. However, the benefits are not for everyone.
Franchisees should reconsider the agreement if the following clauses existed:
Liquidated Damages Clauses
Liquidate damages clauses benefit franchisors at the expense of the franchisees. Liquidated damages occurs when non-performing a provision of a contract, in case the Franchisees fail to perform their mentioned obligations in the agreement such as sales targets and profit goals. If the franchisee doesn’t reach the targets mentioned in the agreement, a liquidated damages clause shall occur and the Franchisee shall be obliged to pay sum of money to the Franchisor.
In this case, Buyback clause is much safer. Buyback clause is a clause in the contract that acquires the franchisor the right to repurchase or repossess the franchise or the venture when the failure of the franchisee to perform a provision of the contract occurs.
Insufficient Startup Clauses Support
Franchisee enters into a franchise because starting a new business from scratch is very difficult and expensive so by entering into a franchise, the franchisee can tap into the resources of the franchisor to establish the venture or the franchise. Thus, the franchisee must ensure that the franchisors will provide them with enough support such as training, remodeling assistance, equipment and reduced supply costs, during the first few years of the established venture or franchise.
Mandatory Arbitration Clause
Mandatory Arbitration is a clause in a contract that requires the parties to resolve contract disputes before an arbitrator rather than through the court system. Mandatory binding arbitration may require the parties to waive specific rights, such as their ability to appeal a decision. Thus, mandatory arbitration will basically benefit the franchisor, in case the franchisee agreed to mandatory arbitration, he may be giving up legal protections.
Mainly the arbitration clauses in franchise agreements includes provisions such as the franchisors are the ones who selects the arbitrator, the parties share arbitration costs equally (which may cost a fortune) and waiving the franchisee’s right to appeal.