Explanation

The franchisor’s 2011 financials show declining revenue and net income. More critically, Note 9 to the financial statements reveals that a related party required a major debt restructuring and a $150 million capital infusion in January 2012 after having defaulted on its credit facility covenants. This indicates significant financial distress within the broader corporate family, which could impact the franchisor's ability to support you.

Potential Mitigations

• Your accountant must conduct a thorough review of the audited financial statements, including all footnotes, to assess the franchisor's viability.
• Discuss the implications of the parent company's recent debt restructuring and its potential impact on the franchise system with your franchise attorney.
• A business advisor can help you weigh the risks associated with a system that has recently experienced significant financial turmoil.

Explanation

The FDD discloses an extremely high rate of franchisee turnover. In 2011 alone, approximately 26.4% of operating franchises were terminated or otherwise ceased operations, in addition to transfers. Item 20 tables show the system shrank by 423 franchised units in 2011 and by over 2,000 units in three years. This level of churn is a critical red flag, suggesting potential systemic issues with profitability, support, or the business model.

Potential Mitigations

• You must contact a significant number of former franchisees listed in the FDD to understand why they left the system.
• Your accountant should analyze the turnover data in Item 20 across all three years to understand the full scope of the system's contraction.
• Discussing this high turnover rate and its potential causes with a franchise attorney is essential before making any commitment.

Explanation

The ultimate parent company is majority-owned by Avenue Capital Group, a private equity firm. The FDD discloses a complex corporate structure with affiliated entities controlling critical functions like supply chain (AFD) and servicing (TQSC II). The recent parent-level debt restructuring, combined with high franchisee turnover, may suggest a focus on financial engineering over the long-term operational health of franchisees, a risk often associated with private equity ownership in franchise systems.

Potential Mitigations

• Discuss the implications of private equity ownership and the complex affiliate structure with your franchise attorney.
• A business advisor can help you research the private equity firm's reputation and its track record with other franchise systems.
• Question current franchisees about any changes in fees, support, or strategic direction since the current ownership took control.

Explanation

Item 3 discloses an exceptionally large volume of litigation, spanning dozens of pages and including multiple class-action lawsuits brought by franchisees. Allegations include fraud, breach of contract, price fixing, and misrepresentation. This history indicates a deeply troubled and adversarial relationship between the franchisor and its franchisees. Additionally, Item 4 discloses the bankruptcy of a company where a key member of the parent's board previously served as CEO.

Potential Mitigations

• Your franchise attorney must carefully review the nature, frequency, and outcomes of the lawsuits disclosed in Item 3.
• The sheer volume of franchisee-initiated litigation should be considered a major red flag regarding the health of the franchisor-franchisee relationship.
• Discuss the specific allegations raised in these lawsuits with your attorney to understand the potential risks you might face.

Explanation

The FDD contains a prominent "RISK FACTORS" section that explicitly warns you of significant risks. These include the requirement to litigate disputes only in Colorado, the high rate of franchisee terminations and transfers, the large number of franchisees who fail to open, the complete lack of territorial protection, and your personal liability for future royalties even if your restaurant never opens. These are direct admissions of severe risks.

Potential Mitigations

• A franchise attorney must review and explain the potential impact of each risk factor disclosed by the franchisor.
• These explicit warnings should be central to your due diligence discussions with current and former franchisees.
• Your business advisor should help you create contingency plans specifically addressing these acknowledged risks.

Explanation

The Financial Performance Representation (FPR) in Item 19 shows that only 39.3% of all participating restaurants met or exceeded the stated average gross sales of $330,999. This indicates the average is significantly skewed by a minority of high-performing locations, meaning a typical franchisee's performance is likely well below the average figure presented. This can create unrealistic expectations about potential revenue.

Potential Mitigations

• Your accountant should explain the significant difference between an average and a median, and why this data suggests a risk of underperformance.
• Focus your due diligence on speaking with average-performing franchisees, not just those provided as references by the franchisor.
• A financial advisor should help you build projections using more conservative revenue figures than the stated average.

Explanation

The Item 19 FPR provides only top-line average gross sales figures. It contains no information on key operating costs such as cost of goods sold, labor, rent, or other expenses. Without this data, it is impossible to estimate potential profitability from the FDD alone. The document explicitly warns that these figures are before all operating expenses, making them insufficient for a complete financial analysis.

Potential Mitigations

• Recognize that this FPR is for revenue only and provides no insight into profitability; your accountant must help you build a full pro forma.
• Conduct extensive interviews with current franchisees to gather data on their actual operating costs and profit margins.
• Your financial advisor should help you create detailed and conservative financial projections based on your own research.

Explanation

The Item 19 FPR presents an average gross sales figure but fails to provide the median. Given that only 39.3% of franchisees achieve or exceed the average, the median is certainly lower, and the average figure is skewed by high-performing outliers. This obscures the fact that a typical franchisee likely earns significantly less than the average, creating a misleading impression of performance.

Potential Mitigations

• Your accountant should explain the statistical significance of providing an average without a median, and why this is a red flag.
• In your due diligence, specifically seek out franchisees who consider themselves to be average performers, not just top performers.
• A financial advisor can help you develop more realistic revenue projections based on the assumption that median performance is lower than the average.

Explanation

The FDD discloses a number of material facts that indicate profound systemic problems. These include an extensive and troubling history of franchisee litigation alleging fraud and other claims (Item 3), and an extremely high rate of franchisee turnover and net unit decline over the past three years (Item 20). These disclosures, taken together, paint a picture of a franchise system in significant distress with a highly adversarial relationship with its operators.

Potential Mitigations

• A franchise attorney must be retained to review the extensive litigation history and franchisee turnover data in detail.
• It is critical to speak with a large and diverse group of current and former franchisees before making any investment decision.
• Engage a business advisor and accountant to help you assess the viability of the business model in light of these disclosed systemic issues.

Explanation

The data in Item 20 is alarming. The number of franchised outlets declined from 4,378 at the start of 2009 to 2,349 at the end of 2011, a 46% contraction. In 2011 alone, 595 units 'Ceased Operations-Other Reasons' and 199 franchisees who had signed agreements were terminated for not opening. This data strongly indicates a system with widespread franchisee failure and an inability for new franchisees to get their stores open.

Potential Mitigations

• Your accountant must analyze the data in all Item 20 tables to grasp the full extent of the system's decline.
• A franchise attorney should discuss the legal implications of such high failure and termination rates.
• Speaking with a significant number of the 595 former franchisees listed in Exhibit R is essential for your due diligence.

Explanation

The ongoing fee structure appears exceptionally high, totaling up to 11% of gross sales (7% royalty + 1% marketing + 3% local advertising). This high percentage significantly reduces your potential profit margin and increases your break-even point. Additionally, if you fail to report sales, the franchisor calculates fees on an assumed weekly sales figure that is nearly 60% higher than the system average, creating a punitive financial penalty.

Potential Mitigations

• Your accountant must create detailed financial projections to determine if the business model is viable with an 11% top-line fee burden.
• Discuss the high royalty rate with your franchise attorney to see if any negotiation is possible, though it is unlikely.
• Ask current franchisees about their ability to achieve profitability under this demanding fee structure.

Explanation

Beyond the high royalties, you face a web of other required costs and fees payable to the franchisor or its affiliates. Item 8 shows that affiliated companies control the supply chain and provide mandatory services like bookkeeping and payroll, deriving revenue from these activities. This creates a risk of non-competitive pricing and hidden costs. The Franchise Agreement also provides for numerous other fees, such as transfer, audit, and non-compliance charges.

Potential Mitigations

• Your accountant should help you budget for all potential fees listed in Items 6, 7, and 8, not just the primary royalty.
• Discuss the affiliate-controlled supply chain and its potential for inflated costs with your franchise attorney.
• Ask current franchisees about their total monthly payments to the franchisor and its affiliates to get a realistic picture of ongoing costs.

Explanation

The initial franchise fee is generally non-refundable. The risk is magnified by the FDD's disclosure that 199 franchisees were terminated in 2011 alone for not opening their restaurants. This indicates a high probability that you could pay the fee and be unable to open your location for various reasons, resulting in a total loss of your initial payment. A release is also required to obtain a refund even in the limited circumstances where one is offered.

Potential Mitigations

• A franchise attorney should advise you on the high risk of losing your initial fee given the system's track record.
• Do not pay the initial franchise fee until you have financing secured and are confident you can meet all pre-opening obligations.
• Your accountant can help you assess all potential hurdles to opening before you commit non-refundable capital.

Explanation

The FDD discloses that affiliates of the franchisor provide and derive revenue from a number of required services, including bookkeeping, payroll, and music services. This arrangement may lock you into using services that are not competitively priced, and it creates a conflict of interest, as the franchisor benefits financially from your mandatory participation in these programs.

Potential Mitigations

• A business advisor can help you research market rates for comparable services to assess the fairness of the required fees.
• Your franchise attorney should review the terms of these mandatory service agreements for fairness and any hidden costs.
• Discuss the quality and cost-effectiveness of these required services with current franchisees.

Explanation

Although the franchise term is 15 years, the combination of high ongoing fees (up to 11%), extremely high franchisee turnover, and a business model where a majority of franchisees do not achieve the average reported sales, creates a substantial risk that you may not recoup your initial investment or achieve sustained profitability within the contract term. The significant number of closures suggests many franchisees fail to reach a positive return.

Potential Mitigations

• Your accountant must create a conservative, long-term financial model to project the time required to achieve a return on your investment.
• Discuss the system's high failure rate and its impact on the potential for long-term success with your franchise attorney.
• A business advisor can help you assess whether the potential rewards of this franchise justify the significant and well-documented risks.

Explanation

The Franchise Agreement significantly restricts your ability to recover damages in a dispute. Section 21.3 limits any claim for lost profits to the net profits from the prior year's tax return. Section 21.4 states that neither party can be awarded punitive or exemplary damages. These clauses are designed to protect the franchisor from significant financial liability, even in cases of their own wrongdoing, and may prevent you from being made whole.

Potential Mitigations

• A franchise attorney must explain how these clauses severely limit your potential to recover damages if the franchisor breaches the agreement.
• It is important to discuss the enforceability of such liability limitations under your state's laws with your attorney.
• Attempting to negotiate the removal of these one-sided liability caps is advisable, though often difficult.

Explanation

You are required to sign numerous ancillary agreements in addition to the main Franchise Agreement, such as the Sublease, Equipment Lease, and Personal Guaranty. Each of these documents contains its own set of obligations, default terms, and potential liabilities. For example, the Sublease (Exhibit P) contains a cross-default clause, meaning a default on your Franchise Agreement could lead to the termination of your lease, and vice versa.

Potential Mitigations

• Your franchise attorney must review every single ancillary agreement with the same level of detail as the main franchise contract.
• Pay special attention to how default and termination clauses interact across the different agreements; a business advisor can help map these out.
• Understand that your total legal risk is cumulative across all documents you sign, not just the Franchise Agreement.

Explanation

The Franchise Agreement (Section 23.2) contains a strong integration clause stating that you cannot rely on any oral representations made before you signed the contract. This is reinforced by the required Acknowledgment statement in Exhibit N. This makes it extremely difficult to hold the franchisor accountable for any verbal promises or projections made by its sales team, as only the written terms of the final agreement will be legally binding.

Potential Mitigations

• Your attorney will advise that any crucial promise or representation made to you must be put in writing as an addendum to the Franchise Agreement.
• Do not sign the agreement or any acknowledgment form if you are relying on information that is not in the written contract.
• Keep detailed written records of all communications with the franchisor, although your attorney will advise that these may not be enforceable.

Explanation

The entire Franchise Agreement is written by the franchisor's lawyers and is inherently one-sided, granting the franchisor significant power and discretion while imposing numerous, strict obligations on you. While some minor points may be negotiable, the core structure is typically presented on a take-it-or-leave-it basis. This power imbalance is a fundamental risk of franchising that you must accept if you proceed.

Potential Mitigations

• You must retain an experienced franchise attorney to review the entire agreement and explain all your rights and obligations.
• While major changes are unlikely, your attorney can identify the most unreasonable clauses and attempt to negotiate them.
• Do not sign the agreement unless you fully understand and are willing to accept the significant imbalance of power.

Explanation

The Franchise Agreement contractually shortens the time you have to file a lawsuit to one year from when you knew or should have known about the claim. State laws typically provide for much longer periods (e.g., three to six years for breach of contract or fraud). This provision severely limits your legal rights and requires you to act very quickly if a dispute arises, or you will forfeit your claim.

Potential Mitigations

• A franchise attorney should advise you of the significant risk this clause poses to your legal rights.
• It is crucial to be aware of this one-year deadline and to contact legal counsel immediately if you believe you have a claim.
• Your attorney can advise you on whether this provision is enforceable under your state's laws, as some states prohibit it.

Explanation

The FDD's Risk Factors and the Franchise Agreement mandate that any lawsuit against the franchisor must be filed in Denver, Colorado. This creates a significant financial and logistical burden if you are located in another state, as you would have to hire Colorado attorneys and travel for all court proceedings. This 'home court advantage' for the franchisor can discourage franchisees from pursuing valid claims.

Potential Mitigations

• Your attorney should advise you that some states have laws that may override this provision, but you cannot count on it.
• It's important to understand and budget for the potential high cost of out-of-state litigation with your accountant.
• While difficult to change, your attorney can attempt to negotiate for the venue to be in your home state.

Explanation

The agreement requires that Colorado law govern any dispute, regardless of where your franchise is located. The laws of Colorado may offer you fewer protections as a franchisee than the laws of your own state, particularly regarding termination, renewal, and non-competition agreements. This is a strategic choice by the franchisor to ensure disputes are interpreted under a legal framework that is familiar and potentially more favorable to them.

Potential Mitigations

• A franchise attorney licensed in your state should be consulted to compare the protections of your local laws versus Colorado law.
• Your attorney can determine if any franchise relationship laws in your state must apply regardless of what the contract says.
• Understanding the legal landscape of Colorado as it applies to franchising is a key part of due diligence.

Explanation

The Franchise Agreement explicitly states that any legal or arbitration proceeding must be conducted on an individual basis, not as part of a class action. This waiver prevents you from joining with other franchisees to address systemic problems or share the costs of litigation. This can make it financially unfeasible to pursue claims for smaller, individual damages, even if many franchisees are affected by the same wrongful conduct.

Potential Mitigations

• Recognize that this clause significantly limits your legal options for addressing system-wide issues.
• Your franchise attorney can advise on the current enforceability of class action waivers, which is a developing area of law.
• Joining an independent franchisee association, if one exists, can provide a platform for collective action outside of a formal class action.

Explanation

The Franchise Agreement contains a clause in which you waive your constitutional right to a trial by jury in any dispute. This means any lawsuit would be decided by a judge alone. Franchisors include this clause because they believe judges are more likely to rule strictly on the contract language and be less susceptible to emotional arguments than a jury might be, which is often a disadvantage for the franchisee.

Potential Mitigations

• Your attorney should explain the strategic implications of waiving your right to a jury trial.
• While typically enforceable, your attorney can advise if your state's laws provide any grounds to challenge this waiver.
• This is a standard but significant waiver of rights in many franchise agreements that you must be prepared to accept.

Explanation

The FDD is exceptionally clear that you receive no exclusive or protected territory. It states, "We and our affiliates may establish other franchised and company-owned units anywhere we want that compete with you, regardless of proximity to your Restaurant." This means another Quiznos could open directly next to your location, potentially leading to severe sales cannibalization and market oversaturation, a risk for which you have no contractual remedy.

Potential Mitigations

• Your franchise attorney must explain the profound risk of operating without any territorial protection.
• A business advisor should help you analyze the local market to assess the potential for future intra-brand competition.
• While unlikely to be granted, your attorney can still attempt to negotiate for a limited protected territory or a right of first refusal for nearby locations.

Explanation

The Franchise Agreement explicitly reserves the franchisor's right to establish other channels of distribution to sell its products, which may compete with your restaurant. This could include sales through grocery stores, convenience stores, online platforms, or other retail avenues. This creates a direct risk of the franchisor competing against you in your own market, potentially siphoning away customers and sales.

Potential Mitigations

• Discuss with your attorney whether you can negotiate for some form of compensation or revenue sharing from sales made through these channels in your area.
• A business advisor should help you evaluate the potential impact of this alternative channel competition on your business plan.
• Ask current franchisees if they have experienced significant competition from the franchisor's alternative distribution channels.

Explanation

The Franchise Agreement requires all owners with a 25% or greater interest to sign an unconditional personal guaranty. This makes you personally responsible for all debts and obligations of the business, including potentially millions in future lost royalties if the business fails. This means your personal assets, such as your house and savings, are at risk. This is one of the most significant risks in any franchise agreement.

Potential Mitigations

• A franchise attorney must explain the severe and unlimited nature of the personal liability you are undertaking.
• Although difficult, your attorney should attempt to negotiate a cap on the guaranty amount or a 'burn-off' provision that reduces your liability over time.
• Consult with a financial advisor and insurance broker to structure your personal assets and insurance coverage to provide as much protection as possible.

Explanation

The franchisor explicitly states it may require the spouse of an owner to consent to or sign the personal guaranty. This would place your spouse's marital assets at risk, even if they have no involvement in the franchise business. This requirement extends the significant financial risk of the business to your entire family unit and its shared assets.

Potential Mitigations

• Your attorney should strongly negotiate against any requirement for a spousal signature, especially if the spouse is not an owner.
• An attorney can advise you on the legality of such a requirement under the Equal Credit Opportunity Act.
• If the spousal guaranty is unavoidable, both you and your spouse need separate legal counsel to understand the risks involved.

Explanation

The Franchise Agreement contains a very broad, one-sided indemnification clause. You are required to protect the franchisor from nearly all claims arising from your restaurant's operations, including those that might arise from your compliance with the franchisor's own mandatory standards or specifications. The franchisor, however, does not provide a reciprocal indemnification to protect you, creating a significant and unbalanced assumption of risk.

Potential Mitigations

• Your attorney should explain the extensive liability you are assuming under this clause.
• It is important to have your attorney attempt to negotiate for a mutual indemnification clause or to exclude claims arising from the franchisor's own negligence.
• An insurance broker should review this clause to ensure your general liability policy is sufficient to cover these contractual obligations.

Explanation

Before you can sign the Franchise Agreement, you must sign a separate 'Representations and Acknowledgment Statement'. This document requires you to state that you did not rely on any promises or financial projections outside of the FDD. Franchisors use these documents to protect themselves from lawsuits based on misleading statements made by their sales representatives. Signing this can severely weaken your ability to bring a future fraud or misrepresentation claim.

Potential Mitigations

• A franchise attorney must review this document with you and explain its legal significance.
• If you have relied on any promises not contained in the FDD, you must not sign this acknowledgment until those promises are added as a written addendum.
• It is critical to answer every question in this document truthfully and accurately.

Explanation

Item 20 discloses that in some instances, current and former franchisees have signed agreements containing confidentiality clauses that restrict their ability to speak openly about their experience with the franchisor. This practice directly impedes your ability to conduct thorough due diligence, as you may not be able to get a complete and honest picture of the system from the people whose insights are most valuable.

Potential Mitigations

• Your business advisor should help you contact a larger and more diverse pool of franchisees to compensate for those who cannot speak freely.
• When speaking with former franchisees, be aware that some may be legally prohibited from discussing negative experiences.
• A franchise attorney can advise you on how to frame your questions to elicit useful information without violating anyone's confidentiality obligations.

Explanation

Many of the franchisor's obligations and approvals are subject to its 'sole discretion' or what it 'deems appropriate'. For example, extending the 12-month opening deadline is at the franchisor's discretion. This subjective language makes it difficult for you to enforce the franchisor's promises and gives them wide latitude to make decisions that may not be in your best interest, creating significant uncertainty in the relationship.

Potential Mitigations

• A franchise attorney should identify all instances of discretionary language and attempt to negotiate for more objective standards.
• Where possible, your attorney should seek to replace 'sole discretion' with a 'reasonableness' standard, such as 'consent shall not be unreasonably withheld.'
• Be aware that where the contract grants the franchisor discretion, you will have very limited grounds to challenge their decision.

Explanation

While Item 11 outlines the support and training the franchisor will provide, the extremely high rate of franchisee failure (Item 20) and the extensive history of litigation alleging broken promises (Item 3) strongly suggest that the support provided in practice is inadequate. Despite paying ongoing royalties, you face a significant risk of not receiving the quality or level of assistance necessary to succeed.

Potential Mitigations

• You must conduct extensive due diligence by speaking with a large number of current and former franchisees about the quality of franchisor support.
• A business advisor can help you assess whether the franchisor has sufficient and qualified staff to support its franchisees.
• Your franchise attorney should review the support obligations in the contract to determine if they are specific and enforceable.

Explanation

The Franchise Agreement gives the franchisor the right to unilaterally change the Operations Manual and all system standards at any time. You are required to comply with these changes at your own expense. This creates a risk of unpredictable and potentially significant costs for new equipment, remodels, or technology, and it allows the franchisor to alter the fundamental aspects of your business operations without your consent.

Potential Mitigations

• A franchise attorney should try to negotiate limits on the franchisor's ability to impose costly changes, such as a cap on required capital expenditures.
• It is crucial to discuss the history and frequency of system-wide changes with current franchisees.
• Your accountant should help you build a contingency fund into your budget to cover the cost of potential future mandated changes.

Explanation

The Franchise Agreement requires you to pay for all costs associated with system changes mandated by the franchisor. This includes potentially expensive remodels, equipment upgrades, and new technology. A change that benefits the overall brand could impose a significant economic burden on you without a corresponding return on investment, and you have no contractual right to refuse or receive financial assistance.

Potential Mitigations

• Your attorney should attempt to negotiate for cost-sharing provisions for major, mandated system changes.
• Discuss with a business advisor how to evaluate the potential return on investment for any required capital expenditures.
• Understanding that you bear the full financial risk of system evolution is a key consideration your accountant should factor into your projections.

Explanation

You are required to purchase the vast majority of your food, supplies, and equipment from designated suppliers chosen by the franchisor's affiliate, AFD. Item 8 discloses that AFD and other affiliates receive substantial revenue and rebates from these arrangements. This creates a significant conflict of interest and a risk that you will pay inflated prices. The extensive litigation history in Item 3 includes class action claims related to food pricing and the supply chain, indicating this is a major point of contention.

Potential Mitigations

• A business advisor should help you research market prices for comparable goods to assess the competitiveness of the required supply chain.
• Your franchise attorney must explain the risks of a controlled supply chain and the limited recourse you have.
• It is essential to ask current franchisees about their perceptions of supply costs and product quality.

Explanation

The franchisor's affiliate, American Food Distributors LLC, leases beverage dispensing equipment to you. The Equipment Lease Agreement (Exhibit O) states that you accept the equipment 'as is, where is' and that the lessor disclaims all warranties, express or implied. If this essential equipment malfunctions or is defective, you would have no warranty claim against the lessor and would be responsible for the full cost of repairs or replacement.

Potential Mitigations

• Your attorney must review this 'as is' clause and explain the significant risk it places on you.
• Before accepting the equipment, it is wise to have it inspected by a qualified technician.
• An insurance broker should be consulted to see if equipment breakdown insurance can be obtained to mitigate this risk.

Explanation

The franchisor exercises significant control over your location. It must approve the site, and if you participate in the Lease Assistance Program, an affiliate becomes your direct landlord by signing a master lease and subleasing the premises to you. This sublease (Exhibit P) contains cross-default provisions, meaning a default on the franchise agreement is a default on the lease, and vice-versa. This gives the franchisor immense leverage, as they can evict you and terminate your franchise simultaneously.

Potential Mitigations

• A real estate attorney must review the sublease and any lease riders to explain the control you are ceding to the franchisor.
• It is crucial to understand the implications of the cross-default provisions before signing.
• Your attorney should negotiate to remove the cross-default clause, though this is often difficult.

Explanation

If you participate in the Lease Assistance Program, you sign a Sublease with a franchisor affiliate. This agreement gives the franchisor significant control, including the right to assume the lease if you default. Furthermore, Section 19(c) of the Sublease requires you to waive your right to a jury trial and your right to assert counterclaims in any eviction proceeding, severely limiting your legal defenses if a dispute over the property arises.

Potential Mitigations

• An experienced franchise attorney must review the sublease agreement and explain the rights you are waiving.
• Understand that by signing the sublease, you are giving your franchisor the power of a landlord in addition to their power as a franchisor.
• Attempt to negotiate the removal of the jury trial and counterclaim waivers with the help of your attorney.

Explanation

If your franchise is terminated for default, the agreement holds you liable for liquidated damages equal to the net present value of all royalties and other fees that would have been paid for the remainder of the contract term. This can amount to hundreds of thousands of dollars and is a devastating financial penalty. The Risk Factors section even states this applies if you never open the restaurant, creating liability without ever generating revenue.

Potential Mitigations

• A franchise attorney must explain the extreme financial risk posed by this future royalties clause.
• This clause is a primary reason to ensure you fully understand and can comply with all default provisions in the agreement.
• While very difficult to remove, your attorney could attempt to negotiate a cap on this liability.

Explanation

After you leave the system, you are prohibited for two years from having any interest in a competing business located within a five-mile radius of your former restaurant or any other Quiznos location. 'Competitive Business' is broadly defined to include most restaurants that derive more than 10% of gross receipts from sandwiches. This could severely restrict your ability to use your industry experience to earn a living in your community.

Potential Mitigations

• Your franchise attorney should analyze the enforceability of this non-compete clause under your state's laws.
• It is important to negotiate for a more reasonable scope, such as limiting the restricted area to a smaller radius around only your former location.
• A business advisor can help you plan for alternative career paths if you exit the franchise and this covenant is enforced.

Explanation

The Franchise Agreement is a complex legal document with numerous, specific obligations. A failure to comply with any of these obligations, including the standards in the ever-changing Operations Manual, can be deemed a default. A default can lead to termination of the franchise, which would result in the loss of your entire investment and potentially trigger liability for future lost royalties.

Potential Mitigations

• A franchise attorney must conduct a detailed review of all default and termination clauses in the agreement.
• You must implement rigorous operational systems to ensure ongoing compliance with all contractual and manual standards.
• It is critical to seek legal counsel immediately upon receiving any notice of default from the franchisor.

Explanation

The agreements contain cross-default clauses. This means a default on one agreement (like your lease or a loan with an affiliate) is automatically considered a default on the Franchise Agreement, and vice versa. This can create a domino effect, where a single issue under an ancillary contract could give the franchisor the right to terminate your entire franchise business, dramatically increasing your risk.

Potential Mitigations

• Your attorney must identify all cross-default provisions and explain the cascading risks they create.
• It is very important to negotiate for the removal of cross-default clauses, so that each agreement stands on its own.
• If they cannot be removed, your accountant should help you monitor compliance with all linked agreements with extreme care.

Explanation

The Franchise Agreement provides numerous grounds for immediate termination without any opportunity for you to cure the default. These include insolvency, abandonment, and repeated non-compliance. For other defaults, the cure periods are very short (e.g., ten days for payment defaults). This gives you very little time to fix a problem before facing the loss of your franchise, granting the franchisor significant leverage and power.

Potential Mitigations

• A franchise attorney should review all termination clauses and explain which defaults have no cure period.
• It is crucial to negotiate for the right to cure most defaults and for longer, more reasonable cure periods.
• Understanding which actions can lead to immediate termination is essential for risk management.

Explanation

Upon termination, the franchisor has the option to repurchase your restaurant's assets. The purchase price is set at 30% of the gross sales from the previous 12 months. This formula does not account for the fair market value of your assets or any goodwill you have built as a business owner. This could result in you being forced to sell your assets back to the franchisor at a price far below their actual worth, causing a significant financial loss.

Potential Mitigations

• A franchise attorney must explain how this repurchase clause can lead to the forfeiture of your business equity.
• It is critical to negotiate for a more equitable valuation method, such as fair market value determined by an independent appraiser.
• Your accountant can help you understand the potential financial loss you would incur under this formula.

Explanation

Your right to renew the franchise is not guaranteed. You must meet several difficult conditions, including being in compliance, paying a renewal fee, performing any required upgrades, and signing the franchisor's then-current agreement, which may have much less favorable terms. Most significantly, you must also sign a general release, giving up your right to sue the franchisor for any past grievances. This forces a difficult choice between losing your investment or waiving your legal rights.

Potential Mitigations

• A franchise attorney must explain the significant hurdles and waivers required for renewal.
• It is crucial to negotiate for a guaranteed right of renewal, contingent only on being in good standing, not on subjective approvals.
• Your attorney should attempt to remove the requirement to sign a general release, or at least make it mutual.

Explanation

When you sell your business, the buyer is required to sign the franchisor's 'then-current' Franchise Agreement. This new agreement will likely have different, and potentially less favorable, terms than yours (e.g., higher fees, fewer rights). This can significantly reduce the attractiveness of your business to a potential buyer and lower its resale value, as the business's future economics will be based on the new, less favorable contract.

Potential Mitigations

• Your accountant should factor this risk into any long-term valuation of your business.
• A business broker with franchise experience can help find buyers who understand this common requirement.
• While difficult, your attorney could attempt to negotiate for the buyer to have the right to assume your existing agreement.

Explanation

The franchisor has broad discretion to approve or reject a potential buyer for your business. The conditions for approval are numerous and include subjective assessments of the buyer's qualifications and business experience. The franchisor can use this power to block a sale to a qualified buyer or delay the process, which can harm your ability to exit the system and realize the value of your investment.

Potential Mitigations

• Your attorney should seek to make the criteria for buyer approval as objective as possible.
• It is important to negotiate for a commitment that the franchisor's consent 'shall not be unreasonably withheld.'
• A business broker can help pre-qualify potential buyers to ensure they meet the franchisor's stated requirements.

Explanation

The franchisor holds a Right of First Refusal (ROFR), meaning if you find a buyer for your business, the franchisor has 30 days to decide if it wants to purchase the business itself on the same terms. This can deter potential buyers, who may be unwilling to invest time and money in due diligence knowing the franchisor can swoop in at the last minute and take the deal, potentially depressing the market value of your business.

Potential Mitigations

• Your attorney should explain the chilling effect a ROFR can have on potential buyers.
• It is important to negotiate to remove the ROFR clause from the agreement if possible.
• A business broker must be made aware of the ROFR so they can set proper expectations with prospective purchasers.

Explanation

To sell your business, you or the buyer must pay a transfer fee equal to the greater of $10,000 or 50% of the then-current initial franchise fee. This is a substantial fee that is not tied to the franchisor's actual costs for processing the transfer. This fee directly reduces the net proceeds you receive from the sale of your business, making it harder to realize a profit on your investment.

Potential Mitigations

• Your attorney should attempt to negotiate for a lower, fixed transfer fee that is tied to the franchisor's actual administrative costs.
• An accountant must factor this transfer fee into any calculation of the potential future sale price and profitability of your business.
• This fee is a key point of negotiation in the purchase agreement between you and a potential buyer.

Explanation

If you fail to submit timely sales reports, the franchisor will estimate your Gross Sales to calculate your royalty payment. The agreement states this estimate will be based on assumed sales of $10,000 per week. However, Item 19 reveals the actual system-wide average weekly sales are only $6,365. This means the penalty for late reporting is based on a sales figure 57% higher than average, creating a highly punitive fee structure.

Potential Mitigations

• Your accountant must help you implement strict procedures to ensure sales are reported accurately and on time, every time.
• A franchise attorney should review this clause and advise you on the significant financial risk it represents.
• Understand that this is not a genuine estimate but a penalty clause, and you must avoid triggering it.

Explanation

The franchisor discloses an exceptionally punitive risk: you can be held liable for future lost royalties even if your restaurant never opens. This liability is calculated based on the average sales of all operating Quiznos restaurants. This creates a risk of incurring substantial debt for a business that never had a chance to generate revenue, a situation that could arise if you are unable to secure a location or financing after signing the agreement.

Potential Mitigations

• This clause presents an extreme financial risk that your franchise attorney must discuss with you in detail.
• Before signing the agreement, it is absolutely essential to have a location, lease, and financing fully secured.
• Your attorney should attempt to negotiate this clause out of the agreement, as it represents an unreasonable penalty.