When you become a franchisee, you buy into the franchisor’s business model. Although this undoubtedly has many benefits, it also means you must observe the same processes, rules and procedures as other franchisees in the network. This consistency is key to the success of the franchise and why the franchise agreement is so important – and why they also tend to be non-negotiable.
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What is the purpose of the franchise agreement?
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A franchise contract protects both the brand and the franchisee by providing clarity and transparency. Elements of the agreement cover the length of the franchise term, fees and the responsibilities of the franchisor towards the franchisee. It also details the process for the franchisee wishing to leave the business – for whatever reason – specifying the conditions that must be obeyed after the franchisee’s departure, like not competing in the same market for a given length of time.
The Importance of the Franchise Agreement
Although the franchise contract can seem daunting and complicated at first, they tend to be clear and easy to understand. What it can’t be, though, is individual to each franchisee. Amendments made to the agreement based on the wants and needs of each franchisee jeopardises the overall consistency of franchise brands. If you’re reviewing a franchise contract and identify some changes you'd like to make, then the franchise opportunity probably isn't the right one for you.
Read more: Franchise agreements and the law
Why are franchise agreements not flexible?
From a franchisor’s perspective, offering the same terms and conditions for franchisees demonstrates the fairness and equality of the franchise. Also, from a self-interested viewpoint, maintaining the same contract for all franchisees reduces the amount of administration and paperwork for the franchisor.
What should you do when reading the franchise agreement?
Study the franchise agreement in detail
You need to read everything carefully. It’s recommended that you consult a solicitor that specialises in franchising to help you understand all the terms and clauses before you sign on the dotted line.
At first glance, the agreement can seem pretty one-sided, benefiting the franchisor rather than the franchisee. However, remember that this is to protect the franchise as a whole, including you when you become a franchisee. You’re ultimately buying into an existing business with an established reputation, brand awareness and customer base.
Remember the basics of franchising
Franchise brands build a reputable name by offering a quality and consistent service to customers who then associate the franchise with a certain standard. The agreement purely acts as a safeguard for this reputation. This is why the franchise agreement clarifies the rules and expectations that are required of all franchisees. Individual bad practice from just one franchisee can impact the entire business and therefore the success and profitability of all other franchisees.
Consider hiring a solicitor
Ensure you review all the clauses contained in the agreement with your solicitor and check that existing franchisees are maintaining a reputation that you’re happy to be associated with.
Franchise Agreement Red Flags
Hiring a solicitor should eliminate most of the issues that can arise when signing a franchise agreement. However, just in case, here are three areas that you should approach with caution:
1. Documents being withheld
In the Franchise Disclosure Document, you will find the franchise’s financial information, if any lawsuits have been filed against it, and all of the contact details for the executive team. Franchisors may try to avoid disclosing information that would discourage potential candidates from choosing to invest. They may keep from being transparent about it till the last minute or orchestrate it in a way where they can tell you face-to-face.
2. If the franchisor makes it difficult for you to talk to current franchisees
This is a clear sign that the franchisor has something to hide. If the franchise was thriving, then why wouldn’t the franchisor want to boast the current success through existing franchisees?
3. Discounted prices
If a franchise is offering discounts, then be sure to thoroughly research why. If it’s because there hasn’t been enough interest, then you will want to consider why this might be. Remember that quality franchise opportunities are usually very competitive.
Are franchise agreements truly non-negotiable?
Yes, franchise agreements tend to be non-negotiable, but this doesn’t mean that there isn’t room for compromise. Many of the clauses within the contract will be written very broadly. If it makes you more comfortable that some aspects of the agreement are written more transparently, then you should ask.
This doesn’t mean you’d be given preferential terms over other franchisees, but having unambiguous clauses benefits both you and the franchisor.
An insight into the franchisor
Discussions about the franchise contract will enable you to view how your franchisor interacts in a business situation. The way the franchisor reacts to any requests about amending the franchise agreement will tell you a lot about whether this is a good business to invest in or not.
If they're prepared to be open to discussions about tweaking specific clauses for clarity, then this demonstrates that they take their franchisees' view and opinions on board. However, if they are too keen to change the contract significantly, then this should act as a warning sign that they do not take the protection of their brand seriously enough. If they are prepared to change the agreement for you, then you may be left exposed to other franchisees requesting amendments that you don't agree with in the future.
Speak to existing franchisees
This is an excellent time to request to meet with existing franchisees within the business. They should be able to give you an honest account of what the franchise is like and what level of support the franchisor provides. If the franchisor receives good feedback and has a track record of retaining satisfied franchisees, then you can take comfort that this is a good opportunity to invest in.
Consider multiple franchises
Not all franchisors are the same and, while they tend to follow a standard format, every franchise agreement is different too. If you’ve reviewed one contract that wasn’t for you, this doesn’t mean that agreements prepared by other franchise brands won’t be more suited to the opportunity you’re looking for. Consider a couple of different franchises before you decide that the industry isn’t right for you.
Don’t expect to make big alterations to the franchise agreement
Just remember, before you request that the terms of your franchise contract are changed, you should take a step back. Is it reasonable to expect existing franchisees to accept the fact that you have different terms to theirs? And how would you react if a future franchisee amended the terms to suit their individual needs? Investing in a franchise is not the same as setting up your own business. You're joining someone else’s business model and you need to make compromises as well as enjoying the benefits on offer.
However, there are four small areas that you may be able to negotiate. These might make you enjoy more favourable terms, without actually impacting the day-to-day running of the business. In general, you are more likely to be able to negotiate with less established franchises that haven’t been active for too long.
Four Minor Negotiations You May Be Able to Make with the Franchise Agreement
1. Paying your franchise fee in instalments
Many franchisors aren’t keen on letting their franchisees pay their franchise fee in instalments. It doesn’t do any harm to ask though, just in case there is some flexibility or they can provide in-house financing. Remember, if you don’t ask, you don’t get, but remember what we said about not expecting too much.
2. Assistance with the launch
Most franchises will provide help with the grand opening in some shape or form, but it’s the extent of this that could be up for negotiation. This could be in the form of guidance and training prior to the launch day, or even how much the franchisor contributes towards the advertising costs.
3. Right of first refusal
One area you might be able to discuss with the franchisor is their right to buy back the franchise if you want to sell before the end of the contract.
4. Waiving signing a personal guarantee
The majority of franchise agreements will involve signing a personal guarantee, even if you form a corporation to operate the particular location. You could discuss with your franchisor the possibility of waiving this or limiting your liability. To do this, you need to show that the corporation would be able to cover the loss if the franchise did end up flopping.
Becky Martin, Point Franchise ©