When you start an independent business, generally the worst thing that can happen is that you are not successful and have to shut the doors and close down.  You will lose every penny that you have invested, but generally, that is it.

THIS IS NOT THE CASE WITH MANY FRANCHISES.  THINGS CAN ACTUALLY BE MUCH WORSE!

I have seen many franchise agreements that, in the event that you are losing money and must close down, will require you to pay the franchisor up to tens of thousands of dollars of estimated future royalities for up to the life of the franchise agreement.

FOR EXAMPLE:  Lets say you sign a franchise agreement for a small pizza store franchise.  You pay a $20,000 franchise fee, and invest another $180,000 into the building, equipment, and fixtures.  This is a 5 year agreement that you have the option to extend for up to (2) more 5 year periods.

Let’s say that you work hard, but after three years you are unable to operate the business because you are not making enough profits.  You try to sell the business, but you cannot find a buyer.  Your only option is to sell your equipment and fixtures for $25,000. 

You would think that you have just lost $175,000 of your investment…but under your franchise agreement, you could still owe the group who sold you the franchise some more money.

The MINOR DETAIL in many franchise agreements is that if you choose to not operate your franchise for any reason, YOU STILL HAVE TO PAY THE FRANCHISE SYSTEM YOUR AVERAGE ROYALITIES FOR UP TO THE LIFE OF THE AGREEMENT THAT YOU SIGNED.  If you had paid an average of $1500 a month in royalties for three years of the (5) year agreement, you would still owe your franchisor another $36,000 after you have closed.

My point in this discussion is to let you know that YOU MUST READ THE FINE PRINT AND SEEK LEGAL COUNSEL!  It is not enough to simply call other franchisees and ask them how things are going.  It is often in their best interest to tell you all the good, because if you buy a franchise, the system grows, and potentially so does the name recognition of the brand they already own.  Always seek outside counsel and don’t fall in love with a franchise system…there are too many good ones to accept a bad franchise agreement.

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