You’ve done your research on the franchise, and the numbers add up. You’ve spoken with other franchisees in the business, and you like what you’ve heard. You've written that business plan document, and now you feel ready to sign the franchise agreement. But what is it exactly?
The franchise agreement is a legally binding contract that stipulates in detail the responsibilities and expectations of the franchisor and franchisee.
Keep in mind that franchise agreements are generally written to be more advantageous for the franchisor. Once signed, you are legally obliged to uphold all the provisions of the agreement, so it is absolutely essential that your franchise solicitor reviews this contract and explains everything to you in plain English.
If any verbal promises were made to you, make sure they are written into the agreement before you sign it. After signing, the agreement governs your relationship with the franchisor, and any disagreements or misunderstandings will be subject to the terms in the document.
Because it is a contract, it contains critical elements typically found in all business contracts, and some that are unique to franchises. Here are a few parts of the agreement that you and your solicitor should carefully scrutinise to ensure that you understand all the implications.
Who Is Signing the Contract?:
First and foremost, be absolutely certain about the identity of the party with whom you are doing business. Is it the parent corporation signing the agreement or is it a master licence owner? Have you investigated the other party’s business track record and reputation? You must accurately know the partner you are going to be working with for many years.
Duration of the Franchise Agreement:
Next, be sure that the duration of the franchise agreement is clearly stipulated. How long does it last – five, ten, or twenty years? Is it renewable when the initial contract expires? If the contract is renewable, how much will you have to pay – a nominal fee or the full franchise fee?
Franchise Fees:
The section detailing initial and ongoing fees should be thoroughly examined. Most franchisors require a royalty, which is a percentage of gross sales. Check to see if you must pay a minimum royalty even if the gross sales vary.
Advertising:
Another factor that can impair your profit margin is advertising. Carefully examine your obligations to contribute towards advertising and marketing, and check what the franchisor will provide in return. Review this clause so you know just how much of the franchisor’s advertising budget will go towards promoting your business at national level and how much will go towards local advertising. Is promotional literature provided?
Franchise Training:
The logistics, duration, location, and costs of training should be described in the franchise agreement. Usually franchisees must pay their own travel and lodging expenses during training, and these can be prohibitive if the training period is prolonged.
Operations Manual:
As a franchisee, you will need guidance on the procedures required for running the business. These should be outlined in the 'operations manual', which is basically your business management bible. Find out if you will be given a hard copy or if you must download it. How often is it updated? Is there an additional fee or deposit for receiving it?
Trade Dress:
One aspect of the contract that is unique to franchise operations is 'trade dress'. This broadly refers to the logo usage; the image and décor of the high street premises; and the clothing worn by employees. Some requirements about trade dress are very stringent, while others are less formal. Be certain you understand and can meet these guidelines. Who pays for the signage and special fixtures that are part of the trade dress? And how often must these features be replaced?
Hours of Operation:
What are the hours you are expected to be open? Don’t commit to any rules about hours of business unless you are certain you can meet them. If you fail to meet them, the contract can be considered breached and your standing as a franchise owner might be jeopardised.
Procurement and Supplies:
Another pivotal element of the franchise agreement is the question of supplies and products. Must you buy everything exclusively from the franchisor or are you allowed to use items obtained from other sources? Are you required to make a minimum purchase of goods? Does the franchisor mark up products sold to franchisees and what protections are in place to prevent unfair price increases? Know where your products are coming from, and what is a decent price to be paying for them.
Personnel Policies:
All businesses rely on the people who do the work to achieve success. What are the policies regarding staffing? Are there defined methods for recruiting and training staff? What, if any, corporate human resources policies – e.g. sick time, holiday pay, bonuses – must be followed? These practices should be detailed in the operations manual, but be sure to double check.
Grand Opening:
Selling or Transferring Your Franchise:
How much control does the franchisor exert over selling or transferring your individual franchise business? Does the franchisor have approval rights regarding prospective buyers? What percentage of the sale is the franchisor entitled to, and when must it be paid? It is always wise to have a good exit plan before investing in anything, so know what your rights and obligations are in relation to selling the franchise business.
Termination of the Agreement:
Under what conditions can the franchisor or the franchisee legally terminate the agreement before its expiration date? Be aware of your legal and financial rights in case the franchisor does not meet the agreement's stipulations, and in return know the consequences you’ll have to face if you fail to live up to your obligations.
Death and Other Contingencies:
It sounds morbid, but one must plan for unexpected circumstances and the possibility of catastrophic events. If you should die, is your spouse or any other family member entitled to take over the business? If you and your spouse hold the business jointly, are there conditions about how divorce affects franchise ownership? How responsible are you for rebuilding if business is disrupted by a natural catastrophe, and how does this affect any mandatory fees that are normally due?
Expansion Options:
Does the agreement allow you to expand the business and/or purchase other franchises so that you can own multiple units instead of just one? Though such expansion may seem unthinkable during the stressful phase of obtaining your first franchise, once you’ve got one successful business up and running, you might want to grow beyond a single unit. Find out if that would be possible and what it would cost so that you don’t run into any surprises if you decide to expand in the future.
Territory:
Is your franchise an exclusive territory or does the franchisor reserve the right to open other branches nearby? How is your territory determined – by population numbers? Is it drawn up by geographical map, and if so, how detailed is that map?
Tips on Negotiating the Franchise Agreement
Some franchisors have unbending franchise agreements that all their franchisees must sign and then adhere to, while other franchisors may be more flexible about negotiating the agreement's terms. But be warned – since franchises are built on proven systems and consistency, a franchisor that seems too eager to bend the rules may be a sign that the business is in trouble.
Items that are typically open for haggling include:
Territory rules about exclusivity, future expansion or changes in size.
- Support and resources given to you for the grand opening.
- The training provided to you and possibly your staff.
- Rules about transferring the franchise to other franchisees.
- The start-up date when you are expected to launch the business.
- Your liability limits regarding franchise performance.
- 'Default cure', which governs how much time you have to correct a problem that keeps your franchise from operating properly before you are in default of the contract and your status as a franchise owner is jeopardised.
- Schedules of fee payments.
Your solicitor and your accountant are the most familiar with your individual situation, so seek their advice about which franchise agreement terms you should attempt to alter to make more favourable for you.