What You Should Know About Franchise Agreements

Those that want to become franchise owners should sign a contract. These complex agreements are also known as franchise agreements. They set out the rules and conditions for conducting business. However, you should not sign franchise contracts without fully understanding and reading all of the terms.

What Does a Contract of a Franchise Contain?

Before you look at franchise contracts, it is essential to understand what you should expect to decide whether or not to accept them. Also, you must be able to abide by franchise agreements before you sign. These are the key provisions in most franchise agreements.

  1. The franchisor provides support and training

Franchisees provide ongoing support and training to new franchisees. The foundation of franchises and helping each other succeed for the long term. Through training, the new franchisees can understand the expectations and the best practices needed to succeed. You can get ongoing support like training and equipment discounts as well as advertising subsidies.

  1. Boundaries and franchise territory

The franchise agreement outlines the area that each franchise location covers. Franchisees can’t have locations within a specified close distance from other franchisees. Boundaries and territories are needed to ensure that there is not too much competition in the area. It can reduce sales potential and hinder the success of the franchise.

  1. How long the agreement should be

A typical franchise agreement lasts between 10 and 20 years. It will outline the terms under which another person can buy the franchise. These terms ensure that future franchisees are qualified. There may be a clause related to the right of a first refusal through which a franchisor or another party can purchase the franchise.

  1. Fees and Costs of the franchise to consider

This contract covers all costs that owners of a franchisee should know. Franchise contracts often include requirements on how much money a franchisee must have before purchasing a unit. That way, franchisors can ensure that franchisees can cover everything that is required to manage a property.

  1. Operation rules

There are rules regarding how franchisees should operate the units. The rules can include operating hours, selling specific items and services, and determining the pay scale of employees. These rules could include the management structure, software, and how a franchise’s location must look.

  1. Signs, patents, and trademarks

The owner of the trademark, various patents, and the signage associated with the franchise are the franchisor. This section of the contract describes the permitted and prohibited uses for these entities by a franchisee.

  1. Rights about the renewal of a franchise and a policy for the termination

Here are details about renewing and terminating a franchise. But in case some issues appear, a clause of arbitration may prevent either franchisor or franchisee from ending up in court in the event of a conflict.

Is it Possible to Discuss the Terms of a Contract?

Most franchisors won’t allow you to negotiate your franchise agreements. A lawyer who has experience in franchise law should review a possible agreement and honestly assess which parts may benefit you, the franchisee.

It’s important to remember that the franchisor is trying to preserve the franchise’s integrity and value. Franchisees won’t be successful if they don’t thrive together.  Because of this, most franchisors do not negotiate franchise agreements. It may not be realistic to think that franchisors will sacrifice their interests for franchisees.

You may ask questions if you notice clauses that are not negotiable. You should consider a new franchise with better terms. You may consider the contract as unfavorable to you, keeping you away from a satisfactory return.

The Reason Why Franchisees May Not Benefit From Negotiable Contracts

Franchisors are not likely to negotiate contracts for good reasons. Franchises are established for a long time and have proven to be successful. They know the best ways to make a business work, so they focus on establishing the contract to benefit both the franchisees and them.

Franchising companies also have previous franchisees with whom they have collaborated. The question is how existing franchisees will react in case of negotiating with you. Negotiating could open the door to existing franchisees demanding an equal deal to yours or making changes to their contracts. Franchisors will naturally avoid this. So, they do not negotiate on contracts.

Entrepreneur points out that the strength of the franchisor shows when they don’t negotiate with potential franchisees. It is a sign of confidence in their past contracts and their franchising system. Still, it is essential to ask whether it’s possible to negotiate. If the franchisor wants to discuss the contract’s key points, it may be a sign that their model is flawed. It is best to be cautious.

Franchise contracts are rarely subject to negotiation, but negotiations can sometimes be made for small things.

Minor Negotiations May be Possible

Some franchise agreements may allow minor negotiations. These areas may enable you to negotiate better terms without affecting the franchise’s operation. Though, franchises that are less well-established and newer are more likely to start negotiations when compared to those with a long history.

  1. Assistance Regarding The Big Opening

Additional support is available to franchisees when they open a franchise for the first time. Any assistance is welcome. So, in some instances, the staff will be available to help you with training and guidance. And the franchisors can even cover the marketing and advertising costs.

  1. Personal Guarantee Waiving

Even if you create a corporation to manage your franchise, most contracts require signing a personal guarantee. If you can prove that the corporation can pay the franchise’s loss, some franchisors will waive or limit your liability.

  1. Franchise Fee Installment Terms

While some franchisors won’t allow you to cover the franchise’s fees in installments, others will provide in-house payment. If your franchisor does not offer installment terms, it is worth asking for them.

  1. Extend The Time During the Franchise Operation

If you fail to comply with the contract terms, your franchise could be in breach of contract. You can avoid this if you extend the time. Franchising companies must ensure that their sites operate under their standards. However, you should promptly correct what’s needed.

  1. You Have The First Refusal Right

If you attempt to sell your franchise before it expires, you could get a modification to the franchisor’s rights so that you can purchase your franchise again.

Legal Assistance with Contracts of the Franchise

You may consider a trusted lawyer to negotiate any minor points of your franchise agreement. Lawyers can deal with legal issues and are more credible than you. Since these discussions can be more complex than you can handle, it is a good idea to hire a professional to help you.

Even if changing the contract isn’t in your plan, legal help is often needed. You should have in mind the cost and budget accordingly. An experienced, objective professional can help you assess the contract to avoid making big mistakes. A flawed contract can drain a lot of money from your wallet over the life of your business. Therefore, getting legal advice is a good investment.

  1. Rushed signing

Most franchises require between 4 and 8 weeks to complete the research process. This includes talking with the franchisor, reviewing the company, and looking at different units of the franchise. Finally, you will sign and pay your first fees. It is possible that a problem with the contract may arise if a sales representative or franchisor attempts to hurry you or pressure you to sign fast. You can proceed at your own pace or seek out a franchisor that won’t pressure you.

  1. Documents Withholding

The Franchise Disclosure document contains contact details for the executives and details regarding the franchise’s financials and any lawsuits against it. Franchisees might try to delay the disclosure document in case of an appearance of any troubling information. This is to make sure you lack enough time to read it, and they can spin it when they encounter you. Be cautious with such documents.

  1. Prices that are very low

Franchises that are high quality attract a lot of competition. Therefore, a low price may be indicative of a lower-quality franchise. That’s why it’s recommended to investigate the reasons why the discount was offered. It may be to make franchisees think that they are getting a bargain. But if the low prices are a result of indifference toward this opportunity, you will need to research it before making a commitment thoroughly.

  1. Place A Call

Although the lists don’t count as a warning, if the franchisor doesn’t allow franchisees to talk to those that aren’t on the list, it can be a red signal. Franchisors shouldn’t hide things and should encourage conversing with any member.

  1. Attorney Involvement is Discouraged

Representatives of franchisors may tell you to not “waste money and time” hiring a lawyer to look into your contract. This is because it isn’t up for discussion. This is a warning sign that you need an attorney’s assistance. Although the contract may be unnegotiable, you should still know what it includes and if you are willing to accept or reject the terms.

How Right is Your Gut Instinct?

Do you need to trust your gut instincts when picking a franchise company? Actually, it can come in pretty handy if you feel that there is something wrong. When you are immersed in a field or concept, intuition can often be based on knowledge. Although you can’t express your intuition in numbers, it is based on your knowledge. It is not wise to believe in your gut instinct entirely, but it may help you determine the right course of action if it matches what professionals and experts are telling.

Fransmart provides franchise opportunities for those who are interested in franchise ownership. Find out more about the various franchise options available. There is an opportunity for every interest!