Reviewing A Franchise Agreement: 5 Aspects To Focus On

As a business owner, you expect your business to grow. However, you might not be ready to handle the growth due to limited resources or other factors.

Either way, your inability to handle an expansion can make you consider handing out your rights to another company.

The said company will produce your goods and offer your services, under their company name. This kind of arrangement is known as a franchise agreement. By definition, a franchise agreement is where a business owner sells his rights, and production secrets, to another company, for a given period.

Now, before delving further, it’s good to note there are three words whose definitions you need to know; the franchise itself, franchisor, and franchisee.

The franchisor is the company giving out the rights of its operations; the franchisee is the company taking over the new responsibility, with the franchise being the business the franchisee will form under its name. Before signing, you must review the document as the franchisee. How will you know the aspects to focus on during the review?

5 Prime Aspects To Focus On Franchise Agreement

This article discusses the things you need to check. Read on, and focus on the following aspects:

1. Other Franchisees

You’re probably not the first company to enter into a franchise agreement as a franchisee. Here, it’s advisable to note the franchisees who have worked with the said franchisor before. Most franchise documents will contain this information. 

Consider reaching out to them and inquiring about the partnership they’ve had with the franchisor. Does the franchisor meet the end of their bargain?

Have they had any disputes within their partnership? If yes, how did they solve them? It’s important to work with a franchisor known for all the right reasons in their business partnerships. It more or less assures you of getting the same from them, which is a good foundation for any business partnership.

2. Costs Payable

As a franchisee, there are several costs you’re going to incur during the franchise agreement. How much do franchise owners make? You must know this beforehand if you can manage to fund them.  

One of the costs you’ll incur is the initial cost. You’ll pay an agreed amount of money to the franchisor as soon as you sign the franchise agreement.

The other costs are operational and include royalty, brand development, territory rights, and support. Royalty is what you’ll pay recurrently, often as a percentage of the gross sales you make each month, with others every two weeks. 

During your agreement period, the franchisor needs to market its brand, maintain its websites, and other aspects related to brand development. As the franchisee, you’ll be in charge of these costs.

Support cost is what you’ll pay the franchisor to take care of the technologies you’ll utilize as you run the franchise’s operations. Add up these figures and weigh if you can manage to cater for them; ask if it’s possible to negotiate.

However, it’s good to note that the costs payable vary from one agreement to another; it depends on the franchisor.

3. Ability To Transfer Or Sell

In a partnership, one of the parties might want to leave for various reasons. In this case, as a franchisee, you might want to end your partnership for some reason, such as a lack of understanding with your tandem. However, instead of terminating the contract, you can sell or transfer your rights to another party. 

You must ask the franchisor about this before you sign any agreement. If the franchisor has no issue with you selling your rights, ask how the franchisor will benefit from the new arrangement. It should include any limitations to the partnership.

One of the things to ask is the powers of the franchisor during the sale. Do they have the final say on your choice of the party? Do you have to pay them using the proceeds you’ll get through the sale? And should the need arise, knowing this information beforehand will help you prepare psychologically and legally?  

4. Terms And Conditions

Terms and conditions depict the type of partnership you’ll have with the other parties to the contract. One of the clauses defines rights and obligations. Like any other agreement, each party has a role to play. In this case, the main parties are the franchisor and the franchisee.

Besides defining roles, the terms will also define the limitations of these roles. Familiarize yourself with these to know what you can and can’t do and those of the franchisor. You’ll have a healthy working relationship when all parties know what to and not to expect from each other.

There’ll be mutual respect and no cause of conflict.

Some states have laws regarding franchise relationships. Therefore, as you familiarize yourself with the terms of your contract, ensure to check if there are laws in your state on franchise agreements. If they’re there, know and compare them with what the franchisor is offering on the table.

5. Duration Of The Agreement

Most franchise agreements don’t last a lifetime; they end at one point or another, with most reaching up to 20 years. However, with most contracts, the minimum number of years of the agreement is five years.  

Make a point of checking the minimum and the maximum number of years for your contract. Do you think you’ll have started making profits by the end of the agreement? How will you find this out? Assume the franchise agreement is to last ten years.

Make your financial projections for the next ten years, and compare them with the amount you’ll pay the franchisor, both initial and running costs. Is the money you’ve invested less or more than what you’re projecting?

If less, it shows you’ll start making profits before the agreement ends. However, if it’s more, you won’t get a return on your investment. In such a situation, consider asking the franchisor if they can extend the contract period. 

Once the term has ended, can you renew the franchise agreement? Be sure to ask the franchisor about this; if it’s possible, inquire about the terms for renewal, including any additional costs. 

As previously stated, you might desire to end the agreement before the due date. What’s the procedure for the termination? What is the penalty for the breach? It’s essential that you sign an agreement whose terms you’re comfortable with, despite the situation.

You might ignore some aspects, such as termination, thinking you won’t need to do so. However, a few years down the line, issues arise, and you want to end the contract, only to find the terms unfavorable. In some situations, you might have to persevere until the term ends.

Conclusion

The discussion above has given you the most important information regarding franchise agreements. Thanks to this article, as a franchisee, you no longer need to worry about making mistakes when entering into such partnerships. Therefore, consider adopting the tips discussed herein, and your review process will be smooth. It’s advisable that you seek the services of a legal representative with expertise in this area. They understand franchise agreements better and will advise you accordingly. 

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