You’ve decided on the franchise you want, you’ve approached them, you’ve got your finance in order, it’s time to sign on the dotted line. Now comes the tricky part of understanding the Franchise Agreement.
Let’s start by asking…
What is a Franchise Agreement?
A Franchise Agreement is a legal document that sets out responsibilities, expectations and procedures for both the franchisee and the franchisor.
Unlike other agreements that you may have signed, Franchise Agreements are always non-negotiable (this is to protect the brand / services).
It is therefore worth spending some time with a specialist franchise solicitor who will find out if there are any parts to the agreement that might be considered abnormal.
Length of agreements
Franchise licenses typically have a fixed contract length of anywhere from 5 to 20 years – at the end of this period you may be given the option to renew your license should you wish to continue.
Some franchise models have agreements that are less than 5 years. This could be due to the fact that the business is brand new, or has only recently started franchising.
Either way, you should check with the franchise the terms of the agreement length, and ensure it fits in with your desired lifestyle.
The Franchise Agreement will state how much the upfront cost is for the franchise.
You should make sure you take a look at what ongoing royalties (often called a Management Service Charges or Management Service Fees) are to be paid to the franchisor. These are usually a percentage of sales, but can sometimes be a fixed monthly fee, and may include other elements such as marketing.
The Franchise Agreement will usually dictate mandatory practices such as:
- The territory you have been allocated
- Supply procurement
- Training & personnel policies
- Opening hours
This set of guidelines is usually given to you in the form of an Operations Manual, which will become your ‘go to’ reference point throughout the length of the Franchise Agreement.
Again, you should spend some time speaking to existing franchisees, asking what they like and don’t like about the rules, and to see how they operate.
Termination or selling your franchise
Each franchise termination policy is different so make sure to inspect yours closely to ensure you are familiar with the process should your situation change.
If you should reach the end of your Franchise Agreement and don’t want to renew, then you usually have the option to sell your franchise. Most franchisors will need you to sell on your franchise before exiting the Franchise Agreement entirely.
Make sure you understand the market in your area to see if it is likely that you can sell your franchise – if you don’t, then you may incur a penalty cost from the franchisor.
Finally, before you commit to purchasing the franchise, there are some final considerations you should take a look at.