Franchise Agreement - Everything You Need to Know Before Signing
If you’ve always dreamt about starting your own business but have never had any groundbreaking ideas, opening a franchise can be a great way to profit from someone else’s established brand.
Franchises offer an immediate customer base, pre-determined products and services, and a playbook success.
However, franchising isn’t as easy as it sounds – you’ll need to be prepared to follow the rules and regulations set by the franchisor. You may need to invest in additional training and support.
Before signing a franchise agreement, ensure you understand exactly what’s expected of you.
Familiarise yourself with the following clauses before attending a consultation with your lawyer so you’ll get more out of the talk.
1. Term
- Just because you’ve paid a franchise fee doesn’t mean you get to run your outlet forever.
- The term is the timeframe you get to run the franchise under your current contract.
- Although franchise contracts usually provide for renewal after the term expires, you should never take it for granted that you’ll be able to renew yours.
- It would be best if you always worked out whether you’ll get a decent return on the investment during the first term
2. Renewal
- The renewal clause in the contract will enable you to renew the franchise agreement when the term expires.
- However, it is common practice that you can only renewal the franchise agreement on the condition that you fulfil certain obligations. Do look out for these conditions.
- The renewal clause is essential because it allows the franchisee to continue the business relationship with the franchisor.
- It also creates a sense of security for the franchisor because it knows the franchisee is committed to the business.
3. Exclusive Territory And Reservation of Rights
- As any business owner knows, competition is a fact of life.
- However, when starting a new business, having some protections is essential to prevent a competitor from opening up shop too close to you.
- This is especially important when dealing with a franchisor, who may reserve the right to sell their products through specific channels, such as the Internet.
- Study the contract carefully to see what privileges the franchisor is reserving.
- If you’re uncomfortable with the terms, consider looking for a different franchise.
4. Operations & Source Of Supply
- The uniformity of McDonald’s restaurants around the globe is no coincidence – it is the result of a particular franchising strategy employed by the company.
- Franchisors, or the companies that licence the use of their trademarks and business models to others, maintain a high level of control over their franchisees by dictating many specifics about how the franchises should be run.
- This means that you should expect to be told what the operating hours of your new franchise will be, how to decorate your outlet, or from whom you will purchase your stock.
5. Selling The Franchise
- The sale of a franchise can be a complex process, and it’s essential to be familiar with the conditions governing the deal before putting your business up for sale.
- For example, many franchise agreements include clauses that require the seller to refurbish the premises and pay an administrative fee.
- In addition, the new franchisee taking over from you might be required to pay a fee.
- All of these factors can have a significant impact on the sale proceeds.
6. Termination Of The Franchise Agreement
- A crucial part of being a successful franchisee is understanding and abiding by the franchisor’s rules.
- If you make a mistake and find yourself in default, the franchisor has the right to terminate the contract.
- To avoid this, you must familiarise yourself with all the events that could be considered a default and take steps to ensure you don’t let them happen.
7. Post-Termination Obligations
- If the franchise agreement is terminated, there are several obligations you will have to comply with.
- This includes immediately ceasing the use of any of the franchisor’s trademarks.
- Understanding what you must and must not do is the key to avoiding even more trouble.
It is common for franchise agreements to protect the interests of the franchisor and its franchisees.
Many franchisors, particularly those in business for a long time, require their franchisees to sign and adhere to strict stipulations in their Franchise Agreements.
A good rule of thumb is never to sign anything you don’t understand.
Consult with a lawyer if you need help interpreting the terms. You can rely on them because they understand your circumstance and can help you figure out what changes are needed.