A recognized brand, an operating branch and a proven system. When entering a franchise deal, it is easy to focus on the purchase price and the profit potential. Far less attention goes to the agreement itself, which determines how much freedom you will have to run the business, what happens if you want to sell it, and how much you may have to pay if things go wrong.
Your exposure may reach hundreds of thousands of shekels beyond your investment in the business. Before signing, you need to understand what creates that exposure and what can still be changed.
The Agreement Is Drafted by the Franchisor, for the Franchisor
The franchise agreement you receive is drafted by the franchisor's lawyers to protect its interests: the brand, the royalties and control over the branches. Protecting your investment and preserving the flexibility you will need later are not its priorities.
When buying a branch from an existing franchisee, you also need to ensure that your obligations to the seller align with the franchisor's terms and with the obligations you are taking on.
Guarantees: The Risk Moves From the Company to You Personally
Incorporating a limited company will not shield you from obligations you have personally guaranteed. A personal guarantee may cover all of the company's obligations to the franchisor, with no monetary cap and no defined expiry. A requirement that your spouse also sign can extend the exposure to your family.
On top of that, the franchisor may require an autonomous bank guarantee, which can be called before any dispute is decided. The money you invested in the branch is not necessarily the limit of your loss.
Liquidated Damages: An Additional Liability That Can Prove Costly
Early closure, purchasing from an unapproved supplier or breaching a non-compete may trigger a heavy payment fixed in advance. Where the agreement provides for damages "for each breach," the exposure can accumulate quickly.
You need to check which breaches trigger the payment, how much it is and whether it is added to other charges. This is a clause to negotiate, not a given.
You Carry the Risk. How Much Control Do You Keep?
The agreement may restrict your choice of suppliers, promotions, opening hours and operating methods, and require access to your point of sale systems and financial data. A unilateral change to the operations manual can require you to renovate, adopt new systems and incur costs that were never in your original budget.
Your trading area also needs protection. You invested in the branch: can the franchisor open another branch nearby, or sell directly to customers in your area? Without clear exclusivity terms, competition may come from within the network itself.
Royalties: Payable Even When the Branch Loses Money
When royalties and marketing fees are calculated on revenue, you pay the franchisor even when the branch is losing money. Mandatory purchasing from designated suppliers can further limit your ability to control costs.
It is equally important to check what transparency you receive: how the marketing fund is spent, and whether the franchisor receives commissions or rebates from the suppliers you are required to buy from.
Exit: Easy to Get In, Hard to Get Out
Wanting to sell the branch does not mean you will be able to do so on terms that suit you. Franchisor approval of the buyer, transfer fees, renovation requirements or a requirement that the buyer sign a new agreement can all burden a sale and impair your ability to realize your investment.
Transferring your holding to family members or heirs, and keeping the business running, also need to be addressed in advance. And anyone planning to continue operating independently after the franchise ends must take the non-compete restrictions into account.
The Courts Enforce What You Signed
Many franchisees assume a harsh clause "won't hold up in court." Israeli case law shows otherwise. In the Authentic case, the court granted a temporary injunction against a franchisee who opened a competing business at the branch's location, prohibiting competition for 12 months within a defined area and within one kilometer of every active branch of the network. In the Fresh Kitchen case, the Israeli Supreme Court held that where trust between the parties has broken down, the franchisor cannot be compelled to continue the relationship. The franchisee was left with a possible claim for monetary compensation, should the termination later be found unjustified.
The takeaway: terms are changed before signing. After that, they are binding.
"This Is Our Standard Agreement"? It Is Not Set in Stone
The most common mistake is assuming that "this is the standard agreement and nobody changes it." Presenting an agreement as standard is not a reason to forgo negotiation.
The franchisor has a legitimate interest in protecting its brand and maintaining uniform standards. You have a legitimate interest in limiting your exposure, running your business and protecting your investment. Between these two interests there is room to negotiate, including on:
- The scope of personal guarantees
- Liquidated damages
- Exclusivity and the protected territory
- Your practical ability to sell the branch or transfer it to family
- Exit terms and non-compete restrictions
Not every franchisor will agree to every change. That is why you need to identify what matters most in your deal, where to hold firm and which risks you are not prepared to accept.
Before You Commit for Years
The franchise agreement determines what you will pay, what you are allowed to do and what will remain yours when you want to exit. There is no reason to treat it as a form you sign to get the keys.
About to buy a branch or sign a franchise agreement? As counsel to franchisees, I advise on reviewing the deal and negotiating with the franchisor, with the aim of reducing personal exposure, improving the terms and preserving greater flexibility in running and selling the business.
This article does not constitute legal advice and is not a substitute for a specific review of your transaction.
Natan Mordechai, Adv.
Admitted to the Israeli Bar in 2020, Natan holds a degree in Business Administration with a specialization in Accounting. His practice focuses on transactions, mergers and acquisitions, commercial agreements, technology law and privacy. Before founding the firm, he worked as an investment analyst covering private-market investments at an institutional investor, bringing both legal and financial perspectives to his transactional work.
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