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Franchise Agreements The Basics

Written by: Ian Macleod

Article Overview: What you need to look for when you want to start a franchise and are ready to sign the franchise agreement. So you’ve taken all the appropriate steps; you’ve researched, asked questions, found out about the competition, scouted locations and lined everything up. Now it’s time to sit down and sign the franchise agreement. But before you do, there are several things you need to know. The franchise agreement will be the bedrock of your business, and success (or failure) may lie somewhere inside all those conditions and terms. A smart franchisee will read the franchise agreement very carefully, making sure they understand everything within it. Here are some of the most commonly misunderstood or potential problematic areas you need to be aware of:

Franchise Agreements The Basics

FRANCHISING AGREEMENT BASICS

What you need to look for when you want to start a franchise and are ready to sign the franchise agreement.

So you’ve taken all the appropriate steps; you’ve researched, asked questions, found out about the competition, scouted locations and lined everything up. Now it’s time to sit down and sign the franchise agreement. But before you do, there are several things you need to know. The franchise agreement will be the bedrock of your business, and success (or failure) may lie somewhere inside all those conditions and terms. A smart franchisee will read the franchise agreement very carefully, making sure they understand everything within it. Here are some of the most commonly misunderstood or potential problematic areas you need to be aware of:

1. Be sure negotiation is available. Some franchising agreements can be discussed, changed or amended, while others cannot. Make sure you know where your franchiser stands. It’s quite common for some clauses to be non-negotiable, while others are open to discussion. If you want to alter your franchising agreement, make sure you know what you want to change before you start negotiating.

2. Know what you can or cannot sell. Sometimes it will be very clear what you can or cannot sell through your franchise. Other times, however, it may not be. Make sure you understand exactly what kind of business transactions you are allowed to sell, what you are not allowed to sell and what isn’t mentioned. If something is unclear, you’ll want to get some clarification before you commit your signature to paper.

3. Marketing is vital. Franchisers want to see the franchisee succeed, but in their eagerness they may require you to sustain a marketing budget that is too high. If your agreement calls for a specific marketing budget, you may want to alter it so you have some more leeway. In the early years of a business, too much advertising can kill your cash flow, and being beholden to a set marketing strategy can cause difficulties.

4. Watch for default. Whenever you own a franchise, the franchiser will want to ensure you are complying with their rules and not damaging the franchise’s brand. There are often numerous clauses in any franchise agreement that lay out what you can or cannot do, and what actions will result in you loosing your franchise. These are some of the most important clauses in the franchise agreement, so make doubly sure you understand each and every one of them.

5. Get a professional. Yes, you can do it all yourself and you’ll probably be fine. But buying a franchise can be very complicated, and you just may not have a lot of experience reading or writing legal documents. To be doubly sure your franchise agreement is a good one, you should consult a legal professional who deals with franchising situations. The money you spend consulting with them may seem like a lot at first, but it will be money well spent.

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Article Tags: bedrock, business transactions, cash flow, clarification, clauses, eagerness, failure, franchise agreement, franchisee, franchiser, franchisers, leeway, marketing budget, marketing strategy, negotiation, problematic areas, signature



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Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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