A franchise agreement is a crucial document whether you are the franchisor or the franchisee.
If you are a franchisee buying a franchise is a significant investment and you should not sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor.
The simplest way to begin is to obtain a specimen contract for them to review.
A typical franchise agreement will cover six main areas:
The term of your franchise agreement covers how long the franchise lasts, how it is renewed and on what terms. It also looks at how your franchise can be terminated early. There may well be performance criteria to be met.
This is the geographic area which your franchise covers. Whether or not you have exclusive rights and how the borders of franchise territories are covered.
These come in many forms and are usually broken down into an initial fee, royalties on sales and a regular management fee. Depending on the franchise you may also have other costs to pay. Joint marketing is a common one.
The amount of help you get from your franchisor is often critical for success both when you start your business and on a continuing basis, as you progress.
Most franchisees will place restrictions on what you are and are not allowed to do. They often stipulate how you should run your business. Minimum stock and staffing levels are common, as are where you purchase your stock and how much you can sell you product or service for.
The framework in which you can sell your business and what happens if you can’t continue in business for some reason – perhaps due to ill health or lack of funds.
Other items which need to be considered include how “goodwill” is treated, insurance cover, and intellectual property rights.
We are often approached by new clients who have come to us late in the day in severe difficulties with their franchisor in all the above areas. If we had seen the franchise agreement in advance then most of these difficulties could have been averted. If the franchisor is a member of the British Franchise Association then the contract will be more straightforward but even here there are a number of areas where a new franchisor can be tripped up.
Growing your business using the franchise method is an exciting and proven method to accelerate your business. Your franchise agreement is probably your most valuable business document which will determine how enforceable your rights are against your network of franchisees.
Key to your success is having a sound, clear and fair franchise agreement. From your perspective a franchise agreement should encourage good franchisees whilst providing positive, proactive remedies for those who are under performing or causing difficulties for you or other franchisees.
Your franchise agreement needs to allow your franchisees the right amount of freedom so that they feel the business is their own whilst protecting you from fraud, misconduct and the stealing of your intellectual property.
Important things like providing the right amount of support for your franchisees is vital but you must also make sure that this operation does not cost you too dearly in terms of resources and money.
Getting your agreement wrong can mean that rogue franchisees may ruin your franchise brand and reputation or even copy your idea and start up in competition.
A well drafted franchise agreement will give potential franchisees the courage to sign up with you and perform to the best of their abilities. A poor franchise agreement could deter new applicants or leave you unable to get rid of a bad one causing you and other franchisees difficulties and problems.