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Are Your Agreements Hurting Your System?

Although I concentrate my practice on representing franchisors, I represent franchisees on occasion.  It makes me a better franchisor attorney to see franchise documents from the other side of the table.

I recently represented a franchisee in a multi-unit deal.  The franchisor’s agreements were an example of what every franchise professional should know: if agreements are punitive and ridiculously one-sided, the franchise system will never achieve its full potential.

Where one company owns a franchise system’s trademarks and another company is the franchisor, the owner authorizes the franchisor to use the trademarks through a “trademark license agreement.”  In this transaction, the terms of the Trademark License Agreement were appalling:

  • The owner retained the right to compete against franchisees in their territories using the same trademarks.

  • The owner retained the right to license the trademarks to others, to allow them to develop competing franchise systems using the same trademarks.

  • The same person owned the trademarks and the franchisor.  He had the right to terminate the Trademark License Agreement at any time, without cause.  If he terminated the Trademark License Agreement, all franchisees were required to immediately stop using the trademarks.

Obviously, these terms were deal-breakers.  We had several discussions with the franchisor and its franchise attorney about the Trademark License Agreement.  We explained why its terms would strangle the system’s growth.  The franchisor saw the problem, overruled its attorney, and agreed to amend the terms.  After that, the deal closed smoothly and quickly.  The franchisor’s sales representative called to thank us for explaining the problems with the Trademark License Agreement, drafting amended terms for the franchisor, and helping the franchisor clean up the issues.

Here’s the point.  Ask yourself:

  • Are the terms of my agreements hurting my ability to sell franchises?

  • If the answer is “yes,” can I change the terms without exposing myself to unnecessary risk?

If the terms are hurting your ability to sell franchises, and if you can change them without exposing yourself to unnecessary risk, revise the termsIf you do that, you are much less likely to find yourself wondering why you have a great concept, great people, and no franchisees.

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