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Elements of a Franchise Agreement
If you’re planning on investing in a franchise, it’s important to know what you’re getting into. Though I can’t speak from experience on this issue, it’s clear from my research that most Franchise Agreements (which I will hereafter refer to as “FA”) are complicated and highly weighted toward the favor of the franchiser.
Entrepreneur.com defines a FA better than I could as representing a license to use a specific business operating system employing registered brands and trademarks for a specific period of time in exchange for a specified payment structure. And there is no doubt that a FA is specific about every little detail.
A Franchise Agreement does not mean that you are becoming part owner in the company. On the contrary, all rights to the brand, trademarks and operating systems remain solely the property of the franchiser. As a franchisee, you are more or less an investor, often temporarily.
Be sure that the terms of the FA reflect how the business is portrayed in the UFOC mentioned in yesterday’s post, Finding the Right Franchise. Though every FA varies tremendously based upon the company and product or service provided, most contain the following basic elements:
Operation of the Business
The rules, restrictions and obligations of the franchiser and franchisee regarding the successful operation of the business from the franchiser’s perspective. This includes the repair and maintenance that you are expected to contribute as well as the regulations regarding trademarks, patents, advertising policies, etc.
Where your specific business will operate and any exclusivity rights that may apply. Be aware that part of your investment in a franchise may be the purchase of real property for the business location. Many FAs require that, upon the termination of the agreement, the property be sold to the franchise company, often under market value.
The training and operational support provided by the franchiser throughout the lifetime of the FA. However, this is typically at some cost to the franchisee.
Duration and Renewal
The initial duration of the agreement and your renewal options. The initial term can range from 5-20 years, more frequently toward the shorter end with multiple renewal periods. Most franchisers prefer this policy because any changes made to the FA during the initial term are automatically put into effect upon renewal, and you typically have no idea what those new regulations will be beforehand. Therefore, the longer the initial duration of the FA, the better it is for you, the franchisee. Also remember that, the better your performance, the more favorable the changes will be.
Typically ongoing and usually 4-8% of monthly sales.
What your rights are regarding the sale or transfer of your franchised unit. Usually this contains an option for the franchiser to buy back the unit or have “right of first refusal.”
Dispute Resolution & Termination
The franchise regulations regarding the policy for resolving disputes between franchiser and franchisee, as well as the process for termination of the FA, if necessary.
As a legal assistant, I cannot stress enough how important it is that you have an attorney assist you with your review of the Franchise Agreement. An attorney can interpret the legal jargon usually found in a FA, and consult you accordingly to avoid an unfavorable situation later on.
Related Small Business Buzz Posts:
Finding the Right Franchise for You
Lease or Rental Agreement… That is the Question
Debt Collection Strategies that Work (2 of 2)
Which Business Entity is Right for You? (Part 4)
Competing for Business with a Former Employer