The franchise agreement - what to look out for

Arguably the most important step in becoming a franchise owner is signing the franchise agreement. This is a legally binding contract between the franchisee and the franchisor which details the rights and responsibilities of each party.

This document will govern your relationship with the franchisor for the duration of the agreement and any differences between the parties will be subject to its terms and conditions. It’s essential, therefore, that you fully understand its contents. This is where having a lawyer - especially one who is experienced in franchise contracts - will become extremely useful.

franchise agreement

Although there will be standard provisions no two contracts will be the same as all networks will vary widely. Before signing a franchise agreement, ensure that you look out for the following fundamentals:

Who will sign the agreement?

It is imperative that you do your due diligence on the party that you are doing business with as you will be entering into a long-term agreement with them. Who, exactly, is signing the agreement? Is it the parent corporation or a master licence owner? Know who you are getting into bed with. Have you reviewed their history, reputation and past performance?

What fees are involved?

This section of the agreement will require careful attention. The majority of franchisors will require an upfront fee as well as an ongoing royalty which is typically a percentage of sales you’ll need to pay on a monthly basis. Also look out for any clauses which may involve financial obligations - for example paying a fee if minimum performance requirements are not met.

What’s the duration?

When does the contract expire? Make sure this is clearly stated. Typically the agreement will cover five, ten or twenty years. Also look for whether the contract is renewable and if so what fees this will entail.

Sale of the business

While a franchisee will have the right to sell their business, the conditions of this sale will be governed closely by the agreement. For instance, the franchisor will exert final approval on any prospective buyer. Also be sure to establish how much of the sale price each party is entitled to.

What territory can you operate in?

The agreement will permit you, the franchisee, the right to operate in a specific territory. The details of this territory, including its boundaries, should be well-defined. Also look out for any exclusivity provisions. Do you have shared or exclusive rights to the territory?

Will you receive marketing support?

Oftentimes the franchisor will require the franchisee to contribute towards marketing and advertising costs. Check to see if this is specified in the agreement as well as what you receive in return for this contribution. Will you receive local coverage? National coverage? How is the marketing budget assigned?

What are the trade dress stipulations?

The trade dress is a type of trademark which refers to packaging and overall appearance and  presentation of a product or service. For example, this could include a restaurant's colour scheme. Are the terms flexible or inflexible? Are you required to meet specific requirements such as updating uniforms and signage. Is there a fee involved with this?

Operating hours

Are there set-in-stone times your business is expected to operate? Are you able to fulfill these hours of operation? It’s important that you can meet these requirements else you might be in breach of contract.

Supplies 

Make sure that it’s clear where you need to procure supplies from. You could receive them directly from a named supplier, direct the franchisor, or maybe you will need to source them from a supplier of your choosing.

Personnel

This part of the agreement specifies how you, the franchisee, should train and hire your employees. Are there specific practises you need to adhere to? For example, what should you be offering staff in terms of holiday days, sick days, etc?

Grand opening

You should consult your agreement to see what is stipulated in regard to the public opening of your franchise. How much support will you receive? Will any representative from the franchisor attend? How much capital is each party required to invest into this one-time event?

Expansion

Look to see whether the agreement permits you to expand into a multi-unit franchise and, if so, what costs would be involved. If your franchise becomes a success, multi-unit franchising could prove a lucrative direction for your business.

Termination

Are there any conditions in the contract which allow the franchisor or the franchisee to terminate the agreement before the specified end date? There are typically grounds for either party to do this if certain conditions are not met.

Is there anything missing?

Lastly, is there anything you think may be missing from the contract? Are there any verbal agreements made between you and the franchisor that haven’t been included in the contract?

Negotiation advice

Although all franchises will have standard agreements which will have been honed through years of experience, there still may be some room for negotiation in each individual case. This could include territory boundaries, staffing support, deferral of fees or changing your liability limits in respect of business performance.

As always, it pays to consult a lawyer and an accountant - preferably ones with franchise experience - before negotiating terms and entering into an agreement.


Last in the series: Cost of investing in a franchise

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