Over 100 Red Flags in a Pet Grooming Franchise Agreement: A Case Study
Over 100 red flags in one franchise agreement. That is what we found when a first-time franchise investor from the Southeast brought us a franchise agreement from a national pet grooming franchise. The escalating royalty structure alone could have cost this investor an additional 50% in overhead over the life of the agreement.
The client had already spoken with the franchisor’s sales team, attended a Discovery Day, and was ready to write the check. At Lopes Law LLC, we see this pattern constantly: an excited buyer, a polished sales process, and a franchise agreement loaded with provisions designed to transfer every possible risk to the franchisee. This case was no exception.
Anthony Lopes, Esq. and the Lopes Law team performed a complete franchise agreement review, examining every clause, every defined term, and every cross-reference in the agreement. The result was over 100 individual comments, annotations, and warnings, plus 10 formal negotiation recommendations on the provisions most likely to cause financial damage.
Here is what we found.
What Was at Stake? The Numbers Behind This Deal
The client’s total initial investment was approximately $200,000, including the franchise fee, buildout costs, equipment, initial inventory, and working capital. While this is smaller than a restaurant or med spa franchise, $200,000 is still a significant financial commitment, particularly for a first-time franchise buyer operating without institutional backing.
The franchise term was 10 years. The royalty rate started at 6% of gross revenue. And buried in the fine print were provisions that could transform a manageable business into a financial trap. Let us walk through each one.
Red Flag #1
Escalating Royalties with No Franchisee Control
The franchise agreement set the initial royalty rate at 6% of gross revenue. That is within the normal range for pet service franchises. But the agreement contained a provision that allowed the franchisor to increase the royalty rate by 1% per year, up to a maximum of 9%, at the franchisor’s sole discretion.
Read that again. The franchisor could unilaterally increase the royalty rate by 50% over the life of the agreement, and the franchisee had no ability to object, negotiate, or opt out. The only trigger was the franchisor’s decision to send a written notice.
Why does this matter? Because royalties are calculated on gross revenue, not net profit. A 3-percentage-point increase on gross revenue translates to a much larger impact on the bottom line. For a location generating $500,000 in annual gross revenue, the difference between a 6% royalty and a 9% royalty is $15,000 per year. Over a 10-year term, that is $150,000 in additional fees the franchisee never agreed to when they signed.
What We Recommended
We advised the client to negotiate for a fixed royalty rate for the entire initial term. If the franchisor insisted on escalation, we recommended tying any increases to objective benchmarks such as CPI inflation or systemwide same-store revenue growth, not the franchisor’s unilateral discretion. We also recommended capping the maximum rate at 7%.
Red Flag #2
Uncapped Upgrade and Refurbishment Requirements
The franchise agreement gave the franchisor the right to require the franchisee to make upgrades, refurbishments, equipment replacements, and technology changes at any time during the term. There was no cap on the cost, no limit on frequency, and no obligation for the franchisor to demonstrate that the changes would benefit the franchisee’s location.
In practice, this means the franchisor could mandate a full salon remodel, new grooming equipment, a new point-of-sale system, or a rebrand at the franchisee’s sole expense. We have seen franchisors require $50,000 to $100,000 in mid-term upgrades with less than 90 days notice. For a business operating on thin margins, an uncapped upgrade requirement can be the difference between profitability and insolvency.
What We Recommended
We recommended negotiating a dollar cap on required upgrades during any 5-year period, tying upgrade requirements to the systemwide standard (not a higher standard), and requiring at least 12 months notice before any mandatory capital expenditure. We also advised including a provision that any required upgrades must have a demonstrated return on investment or be waived for locations below a revenue threshold.
Red Flag #3
Liquidated Damages: 36 Months of Projected Royalties
The franchise agreement included a liquidated damages clause requiring the franchisee to pay 36 months of projected royalties at $2,000 per month if the agreement was terminated early by the franchisor. That totals $72,000 in damages, payable immediately upon termination.
This is one of the most aggressive liquidated damages provisions we have seen in a franchise agreement at this investment level. To put it in context, $72,000 represents more than a third of the client’s total initial investment. The franchisee would lose the business, lose the buildout, lose the equipment, and then owe $72,000 on top of everything already lost.
At Lopes Law LLC, we consider any liquidated damages clause exceeding 12 months to be a significant red flag. A 36-month clause is designed to discourage franchisees from exercising their rights, challenging the franchisor, or even hiring a lawyer to review a dispute. The threat of a $72,000 penalty keeps franchisees silent.
What We Recommended
We recommended capping liquidated damages at 12 months of actual (not projected) royalties. We also recommended adding exclusions for terminations caused by franchisor default, force majeure events, or circumstances outside the franchisee’s control. In the alternative, we advised removing the liquidated damages clause entirely and replacing it with a standard actual-damages provision.
Red Flag #4
One-Sided Attorney’s Fees Clause
The franchise agreement stated that if the franchisor prevailed in any legal action against the franchisee, the franchisee would be responsible for paying the franchisor’s attorney’s fees and litigation costs. However, if the franchisee prevailed against the franchisor, the franchisee was not entitled to recover their own attorney’s fees.
This creates a deeply uneven playing field. The franchisor can sue knowing that a win means full cost recovery. The franchisee, even when they are right, absorbs their own legal costs no matter what. This provision discourages franchisees from asserting valid legal claims because the cost of winning can still be devastating.
What We Recommended
We recommended converting this to a mutual attorney’s fees provision, where the prevailing party in any dispute recovers their reasonable fees and costs regardless of which side prevails. This is the standard in most commercial contracts and aligns the incentives for both parties to resolve disputes fairly.
Have a Franchise Agreement on Your Desk?
Do not sign until a franchise attorney has reviewed every page. Our flat-fee review identifies the red flags that cost franchisees tens of thousands of dollars.
Red Flag #5
Broad Immediate Termination Rights for the Franchisor
The franchise agreement listed over a dozen grounds for immediate termination by the franchisor, many of which were subjective and lacked clear definitions. Grounds included “failure to maintain brand standards,” “conduct that reflects negatively on the system,” and “repeated violations” without defining what “repeated” means or how many incidents would trigger termination.
Several of these termination triggers had no cure period at all. The franchisor could send a notice of termination and the agreement was over. Others provided a cure period of just 10 days, which is insufficient for many of the issues described. Bringing a location into compliance with brand standards, for example, might require equipment purchases, contractor work, or staffing changes that simply cannot happen in 10 days.
What We Recommended
We recommended defining all termination triggers with objective, measurable criteria. We advised extending cure periods to a minimum of 30 days for all curable defaults and requiring written notice specifying exactly what the default is and what steps are required to cure it. For subjective standards like “brand image,” we recommended replacing them with references to the operations manual specifications.
Red Flag #6
Renewal Not Guaranteed and Comes with a General Release
The franchise agreement had a 10-year initial term with an option to renew. But the renewal was conditional. To renew, the franchisee was required to sign the then-current franchise agreement (which could contain materially different terms), pay 25% of the then-current franchise fee, and sign a general release waiving all claims against the franchisor arising from the initial term.
The general release is the most alarming part. If the franchisor had violated the franchise agreement, misrepresented financial performance, or failed to provide promised support during the initial 10-year term, the franchisee would have to waive all of those claims as a condition of staying in business. The franchisor essentially gets a clean slate every 10 years, and the franchisee gets to keep paying.
For a deeper look at franchise termination and renewal rights, see our comprehensive guide.
What We Recommended
We recommended removing the general release requirement entirely. No franchisee should have to waive valid legal claims as a condition of renewal. We also recommended negotiating for the right to renew under the original agreement terms (not the then-current agreement), or at minimum requiring 12 months advance notice of what the new terms would be so the franchisee can make an informed decision.
Red Flag #7
Territory Encroachment: Franchisor Reserves Online, Pop-Up, and Non-Traditional Locations
The franchise agreement granted the franchisee an “exclusive territory” within a defined geographic area. On the surface, this looked protective. But the exclusivity had significant carve-outs. The franchisor reserved the right to operate or license others to operate within the franchisee’s territory through online channels, mobile or pop-up units, non-traditional locations (such as kiosks inside retail stores or pet supply chains), and any channel not specifically listed in the agreement.
In the pet grooming industry, mobile grooming units are a rapidly growing segment. A franchisor that reserves the right to place mobile units inside a franchisee’s territory can directly compete with the brick-and-mortar location the franchisee built, staffed, and is paying royalties on. The “exclusive territory” becomes exclusive in name only.
What We Recommended
We recommended closing the carve-outs so that the territory protection applies to all channels, including online, mobile, and non-traditional. If the franchisor insists on retaining some flexibility, we advised adding a compensation mechanism: if the franchisor operates within the territory through any channel, the franchisee receives a royalty credit or revenue share from those competing operations.
Red Flag #8
Non-Compete: 2 Years, 25 Miles, Including Family Members
The post-termination non-compete clause prohibited the franchisee from operating, managing, or having any ownership interest in a competing business within 25 miles of any franchise location in the system for a period of 24 months after the agreement ended. The clause extended to the franchisee’s spouse, parents, siblings, and children.
This is extraordinary. The non-compete did not just cover the franchisee’s own territory. It covered every location in the entire franchise system. If the system had 200 locations, the franchisee would be prohibited from pet grooming within 25 miles of all 200 locations for two years. In a well-distributed franchise system, that could effectively ban the franchisee from the industry nationwide.
Extending the restriction to family members who may have had no involvement in the franchise raises additional enforceability concerns. Courts in many jurisdictions scrutinize non-competes that bind non-parties, but challenging them requires litigation.
What We Recommended
We recommended limiting the non-compete to the franchisee’s specific territory only (not the entire system), reducing the duration to 12 months, and removing all references to family members who are not signatories to the agreement. These changes bring the provision closer to what courts typically enforce and remove the chilling effect of an overbroad restriction.
Red Flag #9
Entity Structure Vulnerability: Personal Assets at Risk
The client planned to operate the franchise as a single-member LLC. The franchise agreement required the client to personally guarantee all obligations under the agreement, and the personal guarantee form included a line for the client’s spouse to sign as a co-guarantor.
A single-member LLC with a spousal guarantee provides almost no asset protection. If the franchise fails, both the client’s personal assets and the spouse’s personal assets would be exposed to the franchisor’s claims, including the $72,000 liquidated damages provision discussed above.
What We Recommended
At Lopes Law LLC, we recommended restructuring the client’s entity to use an S-Corp parent with an LLC subsidiary as the franchisee. The S-Corp holds the ownership interest and provides tax flexibility, while the LLC operates the franchise and serves as the liability shield. We also recommended removing the spouse from the personal guarantee entirely. There is no legitimate business reason for the franchisor to require a spousal guarantee from an investor who can independently demonstrate financial capacity.
Red Flag #10
Opening Deadline Trap: Clock Starts at Signing, Not at Lease Execution
The franchise agreement required the franchisee to open the location within 180 days of signing the agreement. The clock started running on the date the agreement was executed, not the date the lease was signed, not the date construction began, and not the date the franchisor approved the site.
If the franchisee could not find a suitable location within the franchisor’s requirements, the agreement gave the franchisor the right to select the location on the franchisee’s behalf. If the franchisee still could not open within 180 days, the franchisor could terminate the agreement and collect the full 36-month liquidated damages.
This creates a trap. The franchisee signs the agreement, starts paying fees, and then has 180 days to find a location, negotiate a lease, build out the space, pass inspections, hire staff, and open for business. In many markets, commercial lease negotiations alone can take 60 to 90 days. A full buildout for a pet grooming facility with specialized plumbing, ventilation, and equipment can take another 90 to 120 days. The math does not work. The deadline is designed to fail.
What We Recommended
We recommended changing the opening deadline trigger to start at lease execution, not at agreement signing. We advised extending the total period to at least 12 months and adding a force majeure exception for delays outside the franchisee’s control (permitting delays, contractor backlogs, supply chain issues). We also recommended removing the franchisor’s right to select the location unilaterally and replacing it with a collaborative site selection process with defined approval criteria.
The Full Picture: What 100+ Comments Tells You About a Franchise System
Not every comment in our review was a red flag. Many were explanatory notes helping the client understand what provisions actually meant in practice. Some were minor drafting issues or ambiguities that could be clarified without negotiation.
But the 10 red flags detailed above were structural. They were not mistakes or oversights. They were carefully drafted provisions designed to maximize the franchisor’s control and minimize the franchisee’s rights. Taken together, they painted a picture of a franchise system that prioritizes fee extraction and risk transfer over franchisee success.
A prospective franchisee reading the agreement without legal counsel would likely miss most of these issues. The language is technical. The cross-references are complex. And the franchisor’s sales team is trained to dismiss concerns with phrases like “that’s standard” or “no one has ever had an issue with that clause.”
At Lopes Law LLC, we know better because we review these agreements every day. We know what is standard and what is aggressive. We know what courts enforce and what they strike down. And we know how to negotiate the provisions that matter most to our clients’ financial protection.
Key takeaway: This franchise agreement review cost the client $3,000. The escalating royalty provision alone could have cost an additional $150,000 over the life of the agreement. The liquidated damages clause exposed the client to $72,000 in penalties. The uncapped upgrade requirement created unlimited future liability. The total risk identified was many multiples of the review cost. That is the value of a franchise agreement review.
How This Case Study Compares to Other Franchise Agreements
We have reviewed hundreds of franchise agreements across every industry: restaurants, fitness, home services, healthcare, pet care, and more. Every agreement is different, but the patterns are remarkably consistent. Here is how this pet grooming agreement compares.
- Escalating royalties are uncommon but increasingly seen in private equity-backed franchise systems. Most agreements use a fixed royalty rate.
- 36-month liquidated damages are above average. The industry norm is 12 to 24 months, and many courts find anything over 24 months to be an unenforceable penalty.
- One-sided attorney’s fees are unfortunately common. Roughly half the agreements we review lack mutual fee-shifting.
- Non-competes covering family members are a red flag we see in about 15% to 20% of agreements. Courts have struck them down, but litigation is expensive.
- Opening deadline traps are more common than they should be. Many franchisees lose their franchise fee and face liquidated damages because they could not open fast enough.
For a broader look at the red flags that appear most frequently, see our guide to the top 10 franchise agreement red flags.
What Should a Franchise Investor Do Before Signing?
If you are evaluating a franchise investment, here is what Anthony Lopes, Esq. recommends before you sign anything.
- Get a franchise agreement review. Do not rely on the franchisor’s explanation of the agreement. Hire a franchise attorney who reviews agreements regularly and can identify provisions that are outside the norm. At Lopes Law LLC, our FDD Validation Review covers the complete FDD and franchise agreement for a $3,000 flat fee.
- Set up your entity structure before signing. The right structure (typically an S-Corp parent with an LLC subsidiary) protects personal assets and provides tax flexibility. Do not sign a franchise agreement in your personal name.
- Understand the total cost, not just the franchise fee. The franchise fee is a fraction of the total investment. Factor in buildout, equipment, working capital, royalties, advertising fund contributions, required upgrades, and the cost of compliance with operational standards.
- Negotiate. Franchise agreements are negotiable. Not every franchisor will move on every point, but most will negotiate on specific provisions, particularly for qualified buyers. If a franchisor refuses to discuss any modifications, that tells you something about how they treat their franchisees.
- Talk to existing franchisees. The FDD includes a list of current and former franchisees. Call them. Ask about their experience with the franchisor, the accuracy of financial projections, and whether they would make the same investment again.
For a complete breakdown of what franchise lawyers charge, see our guide on how much a franchise lawyer costs.
Frequently Asked Questions About Franchise Agreement Reviews
Most franchise agreements contain between 20 and 50 notable issues that a franchise attorney would flag during a review. The 100+ comments we identified in this pet grooming franchise case study were above average but not unprecedented. At Lopes Law LLC, we have reviewed agreements with as many as 250 flagged issues. Even franchise agreements from well-known brands typically contain clauses that heavily favor the franchisor and should be reviewed before signing.
Escalating royalties are provisions that allow the franchisor to increase the royalty percentage over time. In this case study, the agreement started at 6% and allowed the franchisor to increase it by 1% per year up to 9%, at their sole discretion. This meant the franchisee had no control over a major operating expense. Over a 10-year term, this could increase total royalty payments by 50% compared to a fixed rate.
Liquidated damages are a pre-set penalty amount that the franchisee owes if the agreement is terminated early, typically by the franchisor. In this case study, the clause required 36 months of projected royalties at $2,000 per month, totaling $72,000. Some agreements calculate liquidated damages based on the entire remaining term, which can reach hundreds of thousands of dollars. At Lopes Law LLC, we negotiate to cap these at 12 months or less whenever possible.
Yes, if the franchise agreement permits it. Many agreements include broad termination triggers for subjective reasons such as “failure to maintain brand standards” or “conduct that reflects negatively on the brand,” with no defined metrics and limited or no cure periods. This gives the franchisor the ability to terminate at will. A franchise attorney can identify these provisions and negotiate for objective standards, defined cure periods, and dispute resolution steps before termination.
At Lopes Law LLC, our FDD Validation Review is $3,000 flat. This includes a complete review of all 23 FDD items plus the franchise agreement, with a written report of findings and specific negotiation recommendations. For international franchises, the fee is $6,000. Compare that to the $72,000 in liquidated damages exposure identified in this case study alone. The review pays for itself many times over.
At Lopes Law LLC, we typically recommend a two-layer structure: an S-Corp as the parent entity with an LLC subsidiary as the franchisee. The S-Corp provides tax flexibility and holds the ownership interest, while the LLC operates the franchise and provides liability protection. This structure also keeps personal assets, including a spouse’s assets, separated from franchise operations. The right entity structure depends on your specific situation and should be discussed with a franchise attorney before signing.
Before you sign any franchise agreement, get it reviewed. The cost of a review is a fraction of what you stand to lose. Reach out, we are friendly. Call now for a free consultation at (267) 777-9117.
Last updated: March 5, 2026
Before You Sign, Get It Reviewed
Our flat-fee franchise agreement review gives you a written legal opinion on every material issue before you commit your capital. We work with franchisees in all 50 states.