Hello, this is Song Law Firm.
In the article “13 mistakes new franchisees make and how to avoid them,” Forbes, a business magazine, mentioned that one of the most common and ridiculous mistakes people make is signing a contract as a franchisee without a lawyer. The author said that there are more people than you think who pay franchise fees ranging from hundreds to thousands of dollars and sign long-term contracts of 10 years or more without having a lawyer review the contract, and that there are many people who regret later because of the wrong contract.
We couldn’t agree more with the author. In our franchise law practice, we see a lot of cases where people sign contracts from franchisors without reading them because “everybody else has done it,” and then later, when they have a problem, they go to a lawyer.
Let’s take a look at a fairly common and simple example that we come across: Mr. Hong Gil-dong, a retired corporate employee, had no special skills, but he didn’t want to just stay at home in his old age. He decided to start a small business, and after some deliberation, he decided to join a popular yogurt ice cream franchise.
When he received the contract from the franchisor, the franchisor didn’t rush him into signing it, but explained the legal review period and asked him to review it thoroughly before signing. Mr. Hong tried to read the contract, but it was full of legal terms in English and the small print made his head hurt. He thought about hiring a lawyer, but the franchise fee was high and he couldn’t afford to pay a lawyer.
The franchisor reassured him that it was a “standard contract that all franchisees sign,” so he signed it anyway. He started his yogurt ice cream business in a quiet New Jersey residential neighborhood and made a decent amount of money. But six months later, an identical yogurt ice cream shop opened three blocks away.
Upset, Mr. Hong complained to the franchisor, but the franchisor replied, “There’s nothing in the contract that would be a problem.” Typically, franchise agreements include an exclusive territory, or protected territory, stipulation that no new franchisees can come within a few miles of the franchisee to protect the franchisee. The contract that Mr. Hong signed had such a stipulation, but it was based on a densely populated area like Manhattan, and the radius distance for the protected territory was too narrow. If Mr. Hong had had a lawyer review the contract, the lawyer would have negotiated with the franchisor, pointing out that Mr. Hong’s business was in a secluded residential neighborhood, not in densely populated Manhattan, that the distance was within walking distance, and that he would not be guaranteed sufficient profits, in which case the franchisee’s position would usually be accepted.
Forbes also advises to be wary of “free expert advice” from non-lawyers. Only a lawyer can give legal advice, and a franchisor’s lawyer will never advise a franchisee with certainty that the franchisee is in a bad position. Therefore, it is imperative that franchisees seek the advice of an experienced lawyer before signing a contract.
If you have any questions about franchising or other questions about the law, please contact me at mail@songlawfirm.com. I’ll incorporate them into my next column.