You’ve done it. You have saved up, you received a business loan, you are ready to go. Your ready to purchase a franchise. It’s a huge decision. Whatever the franchise is that you decide upon, you will give them a deposit, attend initial training, and meet other soon to be franchisors. Before the franchise becomes your own you will be faced with a Franchise Agreement to sign.
A franchise agreement can be anywhere from 40-75 or more pages long. This can be intimidating to those who are not familiar with a commercial agreement. As a franchising agreement is fairly complex it is important to understand all the clauses before you sign it. This franchise agreement is the backbone of your business life for the next couple of years, so it must be understood.
Franchisors (especially large ones such as McDonalds) will rarely negotiate or alter their terms from their standard Franchise Agreement. This makes it even more crucial to being able to understand the Franchise Agreement. Once this agreement is signed it will be difficult to argue in court that the terms were unfair when you signed. It is essential that you identify the true cost of owning the franchise. This includes royalties, inventory, advertising costs, minimum stock purchase requirements etc. Also take not of the territorial rights, what exclusive property is yours, who fronts the cost for equipment and what your obligations will be to the franchisor.
One of the most difficult areas of the Franchise Agreement is understanding the renewal and termination clauses. With an attorney, you should finally comb and identify whether your granted an automatic renewal beyond 5 years, what the fee would be, if your allowed to sell the franchise, and whether you have an option to veto some requirements by the Franchise. In most agreements, there will be a minimum period regarding a forfeiture of the franchise fee, inventory or stock, and other financial penalties. There will also be clauses concerning issues of breach, automatic termination, and how to remedy a breach.
The best thing you can do is to ask yourself some “What If” scenarios when reading over your agreement. Ask yourself such things as “What would happen to the franchise if you passed away?” “What happens if you:
- Fail to meet a deadline
- Are sued by a customer
- If you sold a product in another territory
- An employee sues you
Never, ever, ever be afraid to ask the Franchisor such questions before signing on the dotted line. Whatever they tell you or promise you make sure to get it into writing. However, do not forget that some express terms in the agreement will attempt to deny any representations or claims they made to you. So, make sure your attorney is with you or has gone over all the paperwork and explained to you every single term before you sign. Always remember that you should be wary of large purchases and long-term deals!