#8 of 10 Reasons NOT to Buy a Franchise: Post-Term Restrictions
Nolo.com features an article titled: Ten Good Reasons Not to Buy a Franchise.
According to the author, there are ten compelling reasons NOT to buy a franchise. We’re looking at them one-by-one.
8. Restrictions on post-term competition. Let’s say that you decide to purchase a McDonald’s, but after a couple of years you determine that you could run a higher-quality, more profitable burger joint on your own. Unfortunately, due to noncompetition clauses built into almost every franchise agreement, franchisees are not allowed to become independent business owners in a similar business after termination of the franchise agreement. By purchasing a franchise, you may be unwittingly limiting your business opportunities for years after the expiration of your contract.
Reason #8 to not buy a franchise refers to the legal clauses in many franchise agreements restricting or prohibiting the franchisee from owning or operating a similar business in the same market for a period of time following the expiration of the franchise term. However, the example cited refers to restrictions during the agreement term (often a term of 10 years).
Regarding the example cited: How unfair of McDonalds! Should they welcome new franchisees, share with them their trade secrets, train them in systems and procedures that took decades and millions of dollars to develop and refine, and then, in a couple of years when the franchisee decides they want to stop paying royalties, wish them the best of luck as BubbaBurger? Would you want to join a chain that is that foolish - or one that lacks the commitment to building its chain and protecting its intellectual property?
However, checking the post-term covenants of the agreement is important, especially if you already had the expertise to operate a given business without the franchisor. Let’s say you are a real estate agent… can they stop you from being an independent real estate agent in your market after your Century 21 franchise term is up? Check the legal agreements and negotiate this clause if it’s too restrictive. This may be a point for negotiation, and possibly a reason not to buy a particularly restrictive franchise, but probably not a reason to not buy ANY franchise as the article contends.
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POSTED IN: x Franchise 101, x Insider Tips, xBuyer Beware
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