Why don’t franchisees read franchise agreements?

An ongoing challenge in franchising is the lack of understanding among franchisees of their obligations under the franchise agreement.

The Franchise Advisory Centre has taken a great number of calls over the years all asking essentially the same question:

“My franchisor wants to me to do/change/stop doing/upgrade or divest something. Can they make me do that?”

Unfortunately the answer is almost always the same:

“Read your franchise agreement. The answer will be in there!”

After reading the franchise agreement, most franchisees find that the franchisor does have the authority to require a franchisee to do/change/stop doing/upgrade or divest something, and learning this can sometimes come as a shock. Conversations between franchisees and franchisors afterwards might go something like this:

Franchisee: “I didn’t agree to this.”

Franchisor: “Well actually you did. It’s in the agreement you signed.”

Franchisee. “Yes, but there’s a lot of stuff in the agreement. You can’t possibly expect a franchisee to read and understand it all.”

Franchisor: “But you also got professional advice from a lawyer before you signed the agreement.”

Franchisee: “Yes but that was all in legalese and only because you wouldn’t grant the franchise if I didn’t get advice. I didn’t realize I would still need to do/change/stop doing/upgrade or divest something now after being in the system all this time.”

At the end of such a conversation is the awkward moment where the franchisor wishes the franchisee would just get on with it, and the franchisee is clearly reluctant to get on with it because they feel that irrespective of what’s in the agreement, they haven’t tacitly agreed to do/change/stop doing/upgrade or divest whatever it is at the heart of the issue.

Despite the apparent contractual obligation of the franchisee to follow the agreement, the franchisee then often changes tact and questions why the thing needs to be done/changed/undone/upgraded or divested, thus forcing the franchisor to rationalize (possibly for the umpteenth time) why the outcome is needed.

Frustrations can quickly build up on both sides and in the process, the franchisee’s respect and regard for the franchisor is diluted, and the franchisor is often more determined than ever to force the franchisee to do/change/stop doing/upgrade or divest the required thing, or otherwise send the franchisee a breach letter putting them on notice that unless they comply they may have their franchise terminated.

Once threatened with the prospect of termination, the franchisee sees red, the situation is inflamed, and nobody lives happily ever after.

Both sides could (and often do) conduct themselves better in these situations than in the scenario above, but the point remains that the franchise agreement gives the franchisor significant scope to require certain things of a franchisee during the term of the franchise, and more often than not, franchisees are not fully aware of this at the outset.

The most common reason for this is that many franchisees simply do not read their franchise agreements before they commit to the franchise, or even if they do read the agreement, they do not understand or retain its key details and obligations.

Franchise agreements are like the ultimate pre-nuptial contract. Everything that happens in your married life (and indeed, how things will be settled if the marriage ends) are taken into account in a comprehensive pre-nuptial agreement. Franchise agreements are no different, and if anything, are even more comprehensive than pre-nuptial agreements.

The decision to become your own boss and the process of searching for the right business is an emotional journey fraught with highs and lows. When a franchisee finds ‘the one’, the rational analysis of the decision can be compromised by the excitement and emotion of the prospect of finally taking control of your own destiny. Psychologists can make of this what they will but the decision to buy a business has few parallels in many people’s lives.

The nearest comparison in terms of major life-changing decisions might be the decision to get married, or the decision to buy a home. While a certain rationality may exist in both of these decisions, choosing spouses and homes are effectively emotional decisions, and if these are the only frames of reference franchisees have, it is highly probable they will approach the decision to buy a franchise in a similar way.

In other words, they will choose it because they like it, and then will rationalize everything else to fit the decision.

Which means when the time comes for the franchisor to provide the franchise agreement and disclosure documentation, a potential franchisee may already be wedded to the idea of buying the franchise. The advice they seek (if any) will be to validate their decision, not repudiate it. They will focus on the elements that attracted them in the first place, and often not consider or simply discount anything that doesn’t fit their decision, including the franchise agreement.

Once the decision to buy the franchise has been made, a franchisee can view the signing of the franchise agreement as a necessary formality to be tolerated, and the obtaining of advice about the agreement as an inconvenient cost and delay to be endured. This is hardly the mindset that lends itself to robust examination of the contents and implications of the franchise agreement.

The result of an emotionally-driven decision to buy a franchise is that the finer details are overlooked at the outset and only come to the fore as time and circumstances progress, leading ultimately to the sort of conversations outlined above.

Of course there are a great many franchisees who do read their documents in full prior to buying a franchise and develop a complete understanding of their obligations under the franchise agreement before proceeding, but there remains many more who do not. For those who fail to give the agreement proper attention before signing and are emotionally-driven in their buying process, life as a franchisee will sometimes include some unexpected (and not always pleasant) surprises.

To avoid such surprises, and unnecessary future potential conflict with the franchisor, every franchisee should ALWAYS read EVERYTHING (and get professional advice) before committing to buy a franchise.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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See also my recent SmartCompany article Tips for selling an existing franchise.