Franchise Agreement: 5 Things You Should Know

03/01/2018 08:00 | Become A Franchisee

Franchise agreement - 5 things to know

Become a franchisee will be one of the most important personal and financial decisions you will make in your career. That's why it's so important to undertake as much research and planning as you can, and to get professional advice beforehand so you understand the full cost of franchises and the terms of the new contract.

Whether you've already signed your franchise agreement or are just about to, you need to ensure you understand all your rights and obligations. The best way to do this is to find a solicitor that is a member of the bfa and has expertise in franchise law.

Read more: Five reasons why the franchise agreement is in favour of the franchisor

Franchise Agreement UK

Here are 5 things you should know about your franchise agreement.

1 - Is there a cross-default provision?

If you're planning to run multiple franchises, you must check whether your agreement includes a cross-default clause, which will permit the franchisor to default on all your franchises if one of them (or more) fails. This is true regardless of whether all your other franchises are highly profitable businesses. If you've yet to sign the contract, try to get this clause removed so you won't face the risk of losing all your franchises if one of your units doesn't perform well or youre unable to pay the franchise fee.

The franchisor could buy back all your franchises even if the cause of the failure was not your fault. So, for example, if one of your employees shared confidential data with a third party, and this led to a lawsuit and very high legal costs, your business could fail even if you provided all your employees with clear guidance on the importance of confidentiality (i.e. signing a non-disclosure agreement). Removing a cross-default provision will also help you minimise the risk of losing all your businesses if one of your franchises fails because of the location. Therefore, you can ask your franchisor to confirm that any default in one location will not result in a default for all your other franchises. Again, the best way to know where you stand is to hire a franchise solicitor who can run through the contract with you before you sign it.

Read more: Franchise agreements and the law

2 - Can you renew the contract, or terminate it early?

Check whether you can extend your franchise term by renewing the contract. Even if the contract doesn't explicitly state that you can renew, your franchisor may eventually offer this option if your business is doing well, although this is not a guarantee. A guaranteed renewal option is important if you're considering a shorter initial franchise contract (for example, 3 years) but plan to operate the business for several years after that.

Read more: Will My Franchise Agreement Be Automatically Renewed?

It's vital that you are comfortable with the franchise agreement and are willing to commit as much time as is necessary for the duration of the contract. When you plan how you will operate your new business, its important that you regularly refer to the contract so you dont inadvertently breach any of the terms. As always, a franchise solicitor will answer any questions you may have so you can make an informed choice.

Read more: Franchise Agreement Definition

While franchisees will typically be responsible for all the operational cost of franchises until their agreements expires, some contracts may permit an early termination, especially if the business is not performing well.

Read more: Are Franchise Agreements Non-Negotiable?

3 - How much training and support will you receive?

Typically, franchisors will charge their franchisees an ongoing management fee or royalties in exchange for training and support. Training programmes could include detailed guidance on how to train new employees and perform specialist skills, while support packages will often include tailored marketing campaigns to help your new business become established in its area. Do as much research as you can to find out how much training and support you will get and whether this will be adequate and proportionate to the franchise fee.

Read more: Franchise Agreement Explained

If the franchisor has provided financial projections, analyse these so you can determine whether you think they are feasible, and consider getting a professional opinion. You need to look at how the franchisor will respond if you experience any operational problems that you can't resolve on your own.

Some franchisors will provide promotional literature as part of the ongoing management fee/royalties, while others will expect franchisees to pay for these services. Others will also require the franchisee to refurbish/redecorate the premises from time to time, which could prove costly, as the franchisee wont normally have the same economies of scale or negotiating power as the franchisor.

Read more: Franchise Agreement: Can It Be Terminated Early?

4 - Does your franchise have exclusive territory?

An exclusive territory means no other franchisees, outlets or other brands that are controlled by the same franchisor can operate within a specific geographical area around the franchise. Many franchisors will grant exclusive territories to ensure their franchisees will have sufficient footfall to grow into profitable businesses. In fact, many franchisors now use sophisticated software to determine the most suitable areas for exclusive territories. This will save you the time and cost of having to conduct this research yourself before you start your new franchise agreement.

The territory will be determined by factors such as the local demographics, economy, transport infrastructure and competition, which will often be researched by the franchise networks well in advance. However, an exclusive territory isn't essential, as some areas of the country may be subject to less commercial competition than others.

Read more: Franchise Agreement: 5 Things to Look Out For

5 - Is the franchise culture the right fit for you?

It can be easy to put most of your attention on the cost of franchises and their commercial potential, especially if youre planning to buy and operate multiple businesses. However, dont underestimate the importance of finding the right cultural fit. For example, do you want a franchisor that organises regular face-to-face meetings, or would you prefer a network that does almost all its communication via e-mail?

Read more: Whats the point of a Franchise Agreement?

Research your franchisor and look at their background and track record. Find out how quickly they have grown the network, whether there have been any failures, and what type of franchise system they work under. It's also a good idea to meet the head office team so you can get a better idea of the people behind the brand before you sign the franchise agreement.

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