Common Franchisee Legal Mistakes And How To Avoid Them
Starting a franchise can be an exciting way to grow a business under an established brand. But as Chicago business attorneys, we’ve seen how franchisees often overlook key legal issues that end up costing them far more than they anticipated. Whether you’re opening your first franchise or expanding into multiple locations, it’s important that you understand potential legal pitfalls before signing any agreement.
At The Business Law Group, we regularly advise franchisees throughout the greater Chicago area. As “The Chicago Business Lawyers®,” we know how Illinois law intersects with franchise law and how to help protect your investment from the start. Below are some of the most common legal mistakes made by franchisees—and how to avoid them.
Signing The Franchise Agreement Without Legal Review
One of the most common and dangerous errors a franchisee can make is signing a franchise agreement without having it reviewed by a qualified business attorney. These agreements are written by the franchisor’s legal team and are designed to protect their interests, not yours.
The Franchise Disclosure Document (FDD) contains hundreds of pages of information, including fees, obligations, territory rights, and restrictions. If you don’t understand the fine print, you could be agreeing to terms that limit your future growth or lock you into unfavorable conditions.
Under Illinois law, the Illinois Franchise Disclosure Act (815 ILCS 705/) requires franchisors to make certain disclosures to prospective franchisees. But even with the required transparency, it’s still up to the franchisee to analyze those documents critically.
We strongly advise that every franchisee have an attorney review the FDD and the franchise agreement before moving forward. Doing so can reveal hidden risks and lead to better negotiating terms.
Failing To Conduct Due Diligence On The Franchisor
Another legal mistake is failing to investigate the franchisor thoroughly. Franchisees often get excited about brand recognition or potential profit but do little to verify the franchisor’s track record, litigation history, or financial health.
Illinois courts have made it clear that franchisees are expected to perform due diligence. If something goes wrong, you may have limited remedies if you ignore red flags that are in plain sight.
In our practice, we help clients verify whether a franchisor has a history of failed locations, disputes with other franchisees, deceptive earnings claims, or other related issues. That level of research can prevent expensive litigation down the road.
Not Understanding Financial Obligations And Personal Liability
Many franchisees are surprised to learn that even if they operate the business through an LLC or corporation, the franchisor may still require them to sign a personal guarantee. This means that if your franchise fails, your personal assets—such as your home or savings—could be at risk.
The Illinois Business Corporation Act (805 ILCS 5/1 et seq.) allows business owners to limit personal liability through forming a corporation. However, signing a personal guarantee circumvents those protections. It’s vital to understand exactly what you’re promising when entering into a franchise agreement.
We help clients negotiate these guarantees or, in some cases, eliminate them altogether. If the
risk is too high, we’ll help you assess whether the franchise is truly worth the investment.
Violating The Terms Of The Franchise Agreement
Once you’ve signed the franchise agreement, it’s common to run into compliance issues. Franchise agreements are full of rules governing everything from marketing to hours of operation, vendor sourcing, and reporting requirements. Any violation—intentional or not—could lead to penalties or even termination.
Many of the disputes we handle involve franchisors claiming that a franchisee breached the agreement. Even minor violations, such as using non-approved suppliers or failing to report revenue properly, can result in major consequences.
That’s why we emphasize having a strong compliance plan in place from day one. We help franchisees stay current with their obligations and communicate proactively with franchisors to avoid unnecessary disputes.
Misunderstanding Territorial Rights
Territory protection is another area where legal problems arise. Some franchisees assume they have exclusive rights to a geographic area, only to later discover that the franchisor allowed another franchise location to open nearby.
This can happen when the franchise agreement doesn’t define the territory clearly or doesn’t guarantee exclusivity. It’s critical that the agreement lays out exactly what your territory includes—and what protections are in place to prevent market saturation.
Under Illinois law, these issues are generally contractual in nature, meaning if it’s not in writing, you may have little legal recourse. That’s why we work with franchisees before they sign to make sure these terms are clearly defined.
Overlooking The Exit Strategy
Many franchisees don’t think about what happens if they want to exit the business. Most franchise agreements include strict rules on how and when you can transfer or sell your franchise. In some cases, the franchisor has the right to reject a buyer or impose high transfer fees.
A poorly written agreement can prevent you from recouping your investment or passing the business to a family member. We help our clients understand exit options before committing so they can plan for both success and unexpected changes.
Relying Too Heavily On Verbal Promises
Finally, one of the biggest mistakes is relying on what a franchisor representative said, rather than what the contract states. Verbal promises are generally not enforceable in Illinois unless clearly included in the written agreement.
Courts in Illinois apply strict contract principles. If it’s not in the agreement, you cannot rely on it in court. We always advise clients to insist that every important representation be included in the contract itself.
Illinois Franchising Frequently Asked Questions
What Is An FDD, And Why Is It Important?
The Franchise Disclosure Document (FDD) is a legal document that outlines key information about the franchisor, fees, litigation history, earnings potential, and more. Under the Illinois Franchise Disclosure Act, franchisors must provide the FDD at least 14 days before any agreement is signed. Reviewing this document with an attorney can reveal hidden risks and unfavorable terms.
Can I Negotiate The Terms Of A Franchise Agreement?
Yes, in many cases you can. While franchise agreements are often presented as “standard,” there may be room to negotiate fees, territory rights, personal guarantees, and other terms. We often help clients negotiate more favorable terms that protect their interests.
What If The Franchisor Misrepresented Their Earnings Claims?
If a franchisor made false or misleading earnings representations, and you relied on those representations when investing, you may have a claim for fraud or misrepresentation under Illinois law. However, these cases are complex and require careful documentation. Always make sure that any earnings claims are clearly disclosed in the FDD.
How Do I Protect Myself From Personal Liability?
The best way to protect yourself is to form a business entity, such as an LLC or corporation, and avoid signing personal guarantees when possible. We can help you structure your business properly and negotiate to limit or remove personal liability in your agreements.
What Should I Do If I’m Already In A Dispute With My Franchisor?
The first step is to review your franchise agreement and identify any potential violations or defenses. Many agreements require mediation or arbitration, so it’s important to understand your options. We assist franchisees in resolving disputes through negotiation, litigation, or arbitration as needed.
Call Our Chicago Franchise Lawyers For Guidance Before You Sign
Franchising can be a smart way to grow a business, but only when done right. At The Business Law Group, we help franchisees across the greater Chicago area avoid legal mistakes and protect their investments. As “The Chicago Business Lawyers®,” we understand the unique risks franchisees face under Illinois law and how to build a secure legal foundation for long-term success.
If you’re considering a franchise or are already dealing with a legal dispute, call us to schedule your free consultation. Contact our Chicago business law attorneys at the Business Law Group by calling (224) 353-6498 to receive your free consultation. We proudly serve business clients throughout Chicago and the surrounding communities.
The information contained in these blog entries and on this website does not constitute legal advice. While the content discusses various legal issues, it is not intended to and does not provide legal advice. If you are seeking legal advice, you should contact the Business Law Group at 224-353-6498 to schedule a consultation.
