Imagine you’ve done your due diligence on the franchise, and it appears to be a solid fit. You’ve studied the FDD and spoken with other franchisees in the industry, and you’re pleased with what you’ve learned. For your lifestyle and, if you have one, your family, the numbers add up. You’re ready to sign the franchise agreement and make it official.
Basics of a Franchise Agreement
The Franchise Agreement is a legal document that spells excellent detail of the franchisor’s and franchisee’s obligations and expectations. Compare the Franchise Agreement to the Franchise Disclosure Document (FDD) before signing to ensure that the franchise offer indicated in the FDD matches what is stated in the agreement. Also, make sure any verbal commitments made to you are put down in the contract. The Franchise Agreement controls your relationship with the franchisor once it is signed, and any misunderstandings can be resolved according to the agreement’s provisions.
Franchise Agreement Aspects
Here are some elements of the contract that you and your lawyer should go through thoroughly to understand all aspects.
- Who will be the one to sign the contract? First and foremost, be confident that the party with whom you are conducting business is who they say they are. Is the agreement signed by the parent corporation or by the master license owner? Have you looked into the background and reputation of the other party’s business? You must know who the other party is with whom you will be partnering for the contract duration.
- Duration of the contract: Next, double-check that the Franchise Agreement’s term is specified. How many years does it last—five, 10, or twenty? When the first contract expires, is it renewable? How much will you have to pay if the contract is renewable? Is it the entire franchise price, or is there a reduction if you renew your franchise?
- Fees: The part on costs should be reviewed. Most franchisors ask for royalty, either a percentage of gross/net sales or a flat charge (some franchises also have minimums). You must understand all of the terms around minimum performance and revenue-based royalty payments.
- Advertising: is another issue that might eat into your profit margin. Examine your responsibilities for promotion and marketing, as well as what the franchisor will give in exchange. Examine this provision to see how much of the franchisor’s advertising budget will be used to promote your company locally and nationally. What is the distribution of advertising capital? The franchise agreement should provide a clear definition of this.
- Training: Another aspect that might impact your performance is training. The logistics, length, and location of the franchise should all be specified in the franchise agreement. Typically, franchisees are responsible for their living expenses during training, which might be prohibitively expensive if the training time is extended. For example, new McDonald’s franchisees must undergo a training program of nine to eighteen months. Most franchisors will probably not require such a long commitment, but make sure you know how much time and money you’ll need for the training term.
- Handbook: As a franchisee, you’ll require instruction on business processes and procedures in the form of an operations handbook. These should be spelled out in the operations handbook, which is essentially your business’s. Find out if you’ll be given a physical copy or if you’ll have to download it, which is becoming more usual. Is it updated regularly? Is there a charge or payment required to receive the operating manual?
- Trade dress: is a part of the contract that is only applicable to franchise operations. This includes using a logo, the store’s appearance and décor, and even the attire worn by workers. When it comes to trade dress, some companies have stringent guidelines, while others are less formal. Make sure you understand and can follow these rules. And, once again, who is responsible for any trade dress signs and unique fixtures? How frequently do they need to be changed?
- Hours of operation: What are the hours that you anticipate to be open for business? Don’t make any commitments concerning operating hours until you’re confident you’ll be able to keep them. If you fail to meet the required hours, the contract may be considered violated, putting your franchise ownership at risk.
- Purchasing and supplies: The issue of supply and products is another crucial aspect of the Franchise Agreement. Do you have to buy everything from the franchisor? Is it okay if you utilize products that you didn’t get from the franchisor? Understand where your goods come from and what a reasonable price to pay for them.
- Personnel policies: All businesses rely on the people who do the job. What are the company’s personnel policies? Is there a set of procedures for hiring and training employees? What, if any, company human resources policies must be observed, such as sick time, vacation pay, incentives, and so on? These should be outlined in the operations handbook, but double-check to ensure that you know all of the franchisor’s personnel policies.
- Inauguration: What does your franchise agreement say about the start-up of your business? How much assistance does the franchisor provide? Will there be any other corporate representatives present? Is there any particular business attire or procedures that must be followed?
- ‘Grand Opening’: What percentage of your first charge is allocated to a? In terms of public relations, marketing, and advertising, what can you anticipate from the franchisor? Even though this is a one-time event, how your company launches can have a long-term impact on its success. Know what you’ll be doing and how much assistance you’ll get.
- Transferring your franchise: there are a few things to consider. How much influence does the franchisor have over the sale or transfer of your specific franchise? Is the franchisor able to approve or deny prospective buyers? What proportion of the sale does the franchisor get, and when does it have to be paid? This section of the contract lays out how, when, and under what conditions you can sell the company. Before investing in anything, it’s usually a good idea to have a solid exit strategy in place, so understand your rights and responsibilities when selling the franchise.
- Termination of the franchise agreement: Under what circumstances may the franchisor or franchisee legitimately cancel the agreement before it expires? Know your legal and financial rights in this area in case the franchisor fails to follow the agreement’s terms, as well as the financial repercussions you’ll face if you don’t.Death and other unforeseen events: It may sound depressing, but preparing for the unexpected and the likelihood of terrible occurrences is necessary. Is your spouse or other family members eligible to take over the business if you die? Are there any restrictions on how divorce impacts franchise ownership if you and your spouse own the business together? What are your duties to rebuild if a natural disaster disrupts your business, and how does this influence any usually due obligatory fees? Is there any provision in the agreement enabling you to develop the business and/or acquire other franchises so that you own many units rather than just one? Though it may seem impossible during the complicated process of getting your first franchise, once you’ve established a successful firm, you may wish to expand beyond a single location. Find out if it’s doable and how much it’ll cost, so you don’t have any unpleasant surprises if you decide to grow.
- Territory: Is your franchise region exclusive, or does the franchisor maintain the right to open other shops in the area? What factors go into determining your territory? Is it based on population?
Keep in mind that the franchise sector is built on established processes and consistency. If you are interested in purchasing a franchise, you’ll be asked to complete several documents before signing the franchise agreement. Because your lawyer and accountant know the best about your specific situation, ask them for guidance on which franchise agreement clauses you should try to change to make them more advantageous to you. Before you sign the contract, be sure you understand.