Setting up a new franchise business is incredibly exciting, and is a dream for many entrepreneurs. Unfortunately, that dream can turn into a nightmare if the franchisee fails to properly analyse and understand the franchise agreement which they are given.
The franchise agreement is one of the most important documents that a franchisee will ever sign and, in this article, we’re going to take you through the things to look out for before signing on the dotted line.
The name game
The first thing to establish when it comes to your franchise agreement is who the major players are.
Before moving forward, you’ll need to know the identity of the party you are getting into business with and, who will be signing the contract. For example, will it be a parent corporation or a master license owner?
If the language in the contract regarding this is vague, this could be a red flag.
How long will this be going on?
In general, a franchise agreement will run for five years and, it’s inadvisable to sign a contract stating a much longer term. It’s also important to take a look at the information in the contract regarding renewal; for example, if you choose to renew the contract, will there be a fee and, will this be a full or reduced fee?
Where possible, it’s a good idea to negotiate a reduced fee at this stage, rather than waiting until the renewal date comes along.
Time to talk cash
The monthly service fee tends to be a percentage of your takings and will either be based on sales or based on profits.
For a franchisee, a service fee based on sales is usually the best option in terms of being financially better off. While you’re at it, scour the agreement for any hidden fees as it’s incredibly important that you know exactly how much your new business is going to cost you, and when.
Read all about it
One of the many benefits of becoming a franchisor is that you are able to take advantage of advertising and marketing efforts conducted by the franchisor, such as television advertising.
As great as that is, you’ll usually be responsible for marketing your own franchise; particularly if it’s based in a particular area so, you need to check the terms of this in your agreement. For example, there may be a clause stating a required monthly marketing spend which you’ll need to factor into your budget.
Within this section, check to see if you will be required to conduct a ‘grand opening’ of your business and, if so, what this should involve and, how much it will cost.
The learning curve
Any franchisor worth their salt will invest a significant amount of time and money in training new franchisees as this is where the success of their business comes from.
Carefully check the agreement to find out what kind of training will be available to yourself and your employees and, just as importantly, the costs involved with this.
A decent franchisor will not usually expect franchisees to pay for the actual training but, franchisees may be responsible for paying for their own transportation and accommodation during the training period.
A turn up for the books
As with the training, a reputable franchisor will provide new franchisees with an operations manual. This is extremely important as it will be a vital resource while you’re learning the ropes of your new business and, details of this manual, when you’ll get it and who you’ll get it from, should be detailed in your franchise agreement.
Trade dress for success
The term ‘trade dress’ refers to items included in the company’s branding, such as logos, images, decor and employee uniforms. Your franchise agreement should include comprehensive direction on the use of these things as well as the cost and, how often certain items should be replaced.
Time will tell
With most franchise businesses, there will be rules regarding the hours of operation. For example, if your franchise business is a coffee shop, your franchise contract will state the times that your shop should be open to the public. You will need to give this careful consideration to make sure that you are able to fulfil the time obligations as failure to do so may be considered a breach of contract.
In most cases, running your new business will involve employing people to help you. Check the fine print to make sure that you are familiar with all policies and guidelines concerning your staffing.
Paying it forward
While you’re excited about your new business at the moment, there may come a time when you want, for whatever reason, to either sell your franchise or transfer it to another person.
Before committing to the franchise, you’ll need to make sure that your contract answers the following questions:
- How much control does the franchisor have over this?
- How much control will you have over this?
- Will the franchisor have approval rights on your buyer?
- How much of the sale profits will need to be paid to the franchisor?
- When will the sale fee need to be paid to the franchisor?
Lots of franchise businesses are geo-specific and, so, you’ll need to make sure that you know exactly which area your business covers.
You’ve already checked the duration of your franchise ownership but, what happens if you want to pull out before then? Your agreement should clearly detail the circumstances in which your contract can be terminated and any penalties which may be charged.
Worst case scenario
We’re all aware that we won’t live forever and, it’s always a good idea to make sure that your contract states clearly the process involved should you die. For example, will your spouse or partner be able to take over the business or, will it simply revert to the franchisor?
You’ll also want to check for the process regarding natural disasters which may mean that your business is out of action through no fault of your own.
A franchise agreement is designed to make sure that both franchisor and franchisee know where they stand in terms of obligations and costs. In this article, we’ve listed the important things that you should be looking out for and, while this is certainly helpful, you should always take advantage of the services of a legal professional to make sure that your interests are protected.