May 7, 2010
Singin' The Old Franchise Blues Again, Mama...
Singin' The Old Franchise Blues Again, Mama... Cliff Ennico www.creators.com "I'm beginning to talk with a newer franchise company about buying a franchise territory. They are asking for a non-refundable $1,000 deposit along with a signed confidentiality form before I can talk 'seriously' with them. If they decide against me, I get it all back. If I decide not to pursue a franchise, I lose my $1,000. Is this standard operating procedure?" Wait a minute here . . . this is a "newer" (by which I think you mean "early stage") franchise and they want you to give them money just to TALK to them? Frankly, they should be getting on their hands and knees and praising the Almighty that you are even willing to talk to a franchise that hasn't yet proven its concept nationwide! This has a real smell to it, and I wouldn't give them the money if I were you. Some franchises will want you to put a small "earnest money" deposit up front, but only if (1) they will be incurring significant out-of-pocket expenses on your behalf (such as visiting your area and scouting out potential locations for your franchise outlet) that will need to be recouped if you change your mind, and (2) they will credit that amount against your initial franchise fee should you desire to go forward and purchase a franchise territory. If those two conditions are not met, walk away. "My wife and I bought a franchise territory for a nationwide fast-food franchise over a year ago, but still haven't found a suitable location within the six Zip Codes that were assigned to us. We recently learned that the franchise was talking to another franchisee who is interested in opening a store in one of our Zip Codes. Can the franchise do this - essentially sell a piece of our franchise territory out from under us while we're looking diligently for a suitable location?" Franchises make money by selling franchise territories, setting up stores and reaping a percentage of their franchisees' sales - as quickly as possible. Most franchises don't "assign" territories as such (the federal antitrust laws prevent them from doing that), and many won't want to tie up a potentially lucrative territory while you and your spouse take months or years to decide on the "perfect" location. Your franchise agreement may contain a clause saying they won't open another store in your territory. But you have to read the contract language very carefully - often this "exclusivity" applies only after you open your first store (for example, "we will not sell a franchise to anyone within an X-mile radius of your store"), such that specific locations within those Zip Codes will be "up for grabs" until franchisees actually open stores. Have your attorney look at the contract you signed last year and see if this is indeed the case, as I suspect it is. Also, don't hesitate to ask the attorney to write a stern letter to the franchise. "My husband and I bought a franchise several months ago, and we have been having a Dickens of a time trying to find the right location for our first store. The franchise referred us to several local real estate brokers, but none of them knew the franchise territory we had purchased. One broker handed us a roadmap and asked us to help him with directions to specific addresses in his listings. Another broker had only obtained his state license five months previously. Needless to say, these experiences didn't exactly boost our confidence in the franchise's site selection process. Doesn't a franchise have a legal obligation to run its business in a competent manner?" Believe it or not, this is one of the trickiest questions in franchise law right now. State laws are "all over the place" as to whether a franchise owes its franchisees a "duty of competence". Most reputable franchises will stand behind the "criteria" they use to determine if a particular location will be successful for the franchisee or not. They will, however, be quick to admit that they know nothing of the real estate environment in your town, county or state, especially if their corporate headquarters is located halfway across the country. I would think that a franchise does have a duty to refer you to competent, experienced commercial real estate brokers in your area who are at least somewhat familiar with their franchise concept. I would have an attorney look at your franchise agreement and see what specific disclosures were made to you about the site selection process and what the franchise would and would not do for you. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest books are 'Small Business Survival Guide' (Adams Media, $12.95) and 'The eBay Seller's Tax and Legal Answer Book' (AMACOM, $19.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2007 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:50 AM