Microfranchise Does Not Necessarily Mean Microliability

Author: f.alepin@alepin.com

Date: JUN 10th, 2013

Topic: Industry Experts

Microfranchises are generally described as those that require only a small investment or very little equipment, and very often do not even require a store front.

This article will attempt to show that, whereas the investment might be small, the liabilities of the microfranchisee may not be that small.

In effect, a microfranchisee within a network of microfranchisees must make a contractual promise to respect the operations manual of the franchisor as well as the other contractual undertakings provided in the franchise agreement, just as in the case of a 'normal' franchisee, one who is not a microfranchisee.

Here are some of the microfranchisee’s obligations:

1. Devote all his time or all the necessary time required to make the franchise operate adequately: Certain franchisors require an exclusive occupation of the franchisee’s time. This means that, whereas the money invested might be minimal, the microfranchisee has obliged himself contractually to devote most or all of his time to making the business work;

2. Non-competition clause: The franchisor, even within a microfranchise network, wishes to protect his concept and will oblige his franchisees to undertake contractually to not compete with the franchisor during the entire period that the franchisee is a part of his network, and after the end of the franchise agreement, for a certain period of time, generally between one and three years, the whole within a specific geographic territory. This means, consequently, that a microfranchisee, even though he has invested perhaps less than $ 10 000, can find himself with an obligation to not operate a business similar to the one that he was operating when he was a franchisee, for several years after the termination of his franchise agreement. The microfranchisee must know as well that any breach of this obligation exposes the franchisee to penalties, which might be very expensive, as well as to be exposed to a court injunction ordering him to immediately cease violating his contractual obligations. In this way he would be no different than a 'normal' franchisee;

3. Civil liability: Even if the microfranchisee has invested only a small sum of money, he must interact with third parties, which is to say, clients and suppliers, and he can, in certain cases, expose himself to be sued as a result of a fault committed by the microfranchisee, or the improper functioning of the product sold, or even as a result of consequential damages following the services that he may have rendered. In this case, the microfranchisee would be well advised, like any other 'normal' franchisee, to protect himself by forming a corporation, as well as purchasing adequate insurance coverage;

4. Personal Guaranties: The franchisor of a microfranchise network may require his franchisees to be personal guarantors or sureties of the obligations of the business that signed the franchise agreement. In this way, the individual is obliging himself to pay to the franchisor any amounts that may be due by the franchise if the franchise does not pay those sums. I remain convinced, however, that the microfranchise has its proper place in business and that it permits potential entrepreneurs who wish to start their own enterprise, even with limited resources, to successfully do so. I hope that the reader has understood that this article was not written in an attempt to discourage an entrepreneur from being a microfranchisee, but rather to advise him that being a microfranchisee does not necessarily mean having microliabilities.

That is my considered opinion!