What you need to know before you sign.
If you aspire to be an entrepreneur but are unsure what kind of business to create, purchasing a franchise can be an appealing option. Franchises often promise a proven business model, brand recognition, and ongoing support—features that can be especially attractive to first-time business owners.
However, franchise ownership is not as simple as it may appear. While you may be buying into an established system, there is no guarantee the model will succeed in today’s evolving market or even in your specific location. Your business may require local adaptations or additional support that the franchisor is unwilling or unable to provide. In short, franchises are not “plug and play,” and failing to understand the legal and financial risks before signing can lead to costly consequences.
Below are some of the most common issues I see with clients considering a franchise purchase, along with tips to help you avoid them.
1. Virginia Franchise Law and the Franchise Disclosure Document (FDD)
Virginia has specific rules about franchises under the Virginia Franchise Act. For example, Franchisors must provide prospective franchisees a Franchise Disclosure Document (FDD) before any franchise agreement is signed. The purpose of the DFF is to give prospective franchisees transparency into the franchisor’s operations, financial condition, and legal history.
Among other things, the FDD must disclose:
- the franchisor’s financial history, including audited financial statements;
- any past or ongoing litigation involving the franchisor;
- any fees and/or other obligations of the franchisor;
This information is critical to evaluating whether a franchise is a sound investment. Without it, franchisees may unknowingly assume risks that could have been identified and negotiated upfront.
If you recently signed a franchise agreement and were not provided a proper FDD, you may have the right to cancel the franchise agreement. However, this right is time sensitive. In Virginia, you generally only have three months from the date of signing to act. Because this window is short, it is essential to contact a franchise attorney as soon as possible. Failure to act quickly may permanently reduce your options to unwind the deal.
2. Franchise Agreement Pitfalls.
Franchise agreements are long and full of legal terms. Many clients only ask an attorney to review the contract after they’ve signed it, which can limit what can be negotiated or fixed.
Clauses to Watch:
- Vague Language: Words like “reasonable” or “as necessary” may be interpreted broadly by the franchisor, creating obligations you didn’t anticipate.
- Excessive Financial Obligations: Mandatory purchases, upgrades, renovations, and licensing obligations can strain your cash flow and expose you to risks of breaching the Franchise Agreement.
- Missed Negotiation Opportunities: Some terms—like payment schedules or personal guarantees—can often be negotiated, but only if you involve an attorney before signing.
If you involve an attorney early, you can clarify ambiguous terms or conditions before it’s too late. Waiting until after signing often leaves you with little leverage.
3. Beware of Personal Guarantees, Non-Competes, Non-Solicits, and Confidentiality Agreements
Many franchise agreements in Virginia require personal guarantees, which means you—and sometimes even your spouse—could be personally liable for business debts. This can include royalties or operational fees, contributions to advertising funds, lease payments, and even legal claims. Virginia courts generally enforce personal guarantees, so it’s essential to understand the full scope of your personal exposure before signing.
Additionally, most franchise agreements contain restrictive covenants designed to protect the franchisor. Such covenants often include (a) non-compete clauses that limit your ability to operate or work in a competing business during and after the franchise term, (b) non-solicitation clauses that restrict contacting the franchisor’s employees or customers, and (c) confidentiality provisions that govern the use of trade secrets or proprietary information. While these clauses are enforceable under Virginia law, their scope and duration must be reasonable. Overly broad covenants can limit your ability to work or start a new business if you leave the franchise.
4. Final Thoughts
Purchasing a franchise can be a rewarding business opportunity, but it also carries significant legal and financial risks. Understanding those risks, and addressing them before signing, is essential to protecting both your investment and your personal assets.
If you are considering purchasing a franchise or are navigating the complexities of a franchise relationship, Davis, Burch & Abrams can help. For more information, please contact the author of this blog, Josh Orobia, at [email protected].
Disclaimer: This article is for informational purposes only and should not be seen as legal advice.