Signing The Franchise Agreement - 25 Things You Need To Know Before Signing It
Rules, regulations, terms, conditions, obligations, agreements.
Not the glorious words out there. They are quite intimidating. However, when you are thinking of starting a franchise, these words might make up your roadmap.
When you are about to become a part of a franchise, the first thing that you need to consider is reviewing the FDD (Franchise Disclosure Document). Once you read it, spoken to other franchisees in the business, and cleared all your confusion, you are ready to make it official and sign the franchise document.
A franchise agreement is a legally binding document that contains the terms and conditions set by the franchisors for the franchisee.
When you are about to sign the franchise agreement, compare it with FDD, and make sure that both documents match. Also, ensure that if there are any verbal promises made to you, they are also properly documented.
Once you sign the franchise agreement, it will govern your relationship with the franchisor. Any misunderstanding or disagreement will be subject to the terms and conditions in the contract.
Here are the 25 things you and your lawyer should know and carefully scrutinize before signing the franchise agreement.
- 1. Relationship overview: First thing that you need to know is which people are involved in the contract, the ownership of the franchise, and the business will be operated according to the franchisor’s instructions and standards.
- 2. Who’s signing the contract? Investigate the other party’s business records’ identity and reputation and make sure you’re going to work with the licensed party. You need to know exactly who the other party is with whom you will collaborate for business.
- 3. Duration of the franchise agreement: How long does the contract last? Is it for five years, ten years, or twenty? Is it renewable? If it is, how much do you need to pay for the renewal.
- 4. Costs and fees: Beside initial fees, what are the other costs involved in purchasing the franchise. Examine the fees thoroughly to understand all the terms related to the price based on revenues.
- 5. Training: Is there any training program offered by the franchisor to the franchisee? This factor could be costly, so you need to confirm the offer. Again, the duration, logistics, and location of the training must be disclosed in the franchise agreement.
- 6. Location and territory: The franchise territories are of two types: Exclusive and nonexclusive. If you bought an exclusive territory, the franchisor is bound not to sell other franchises in that area. If you purchased a nonexclusive territory, the franchisor could sell the other franchises in that particular area.
- 7. Advertising: Carefully examine your obligations to contribute to marketing and advertising. How much the franchisor’s advertising budget will go in promoting your business on a national and international level.
- 8. Site selection and development: If you want to find the location for your franchise, get it approved by the franchisor. If they approve the design, standards, and location, then you can move forward with it.
- 9. Operations manual: As a beginner, you might need guidance on procedures for running the business. The guidelines should be outlined in the operational manual.
- 10. Use of intellectual property: This includes manuals, patents, and trademarks. What are your rights? What will be offered to you, and how are you expected to use it.
- 11. Trade dress: As indicated by the name, it refers to the employee's clothes, store image and decor, and logo usage. Make sure you understand the requirement and can meet the guidelines. Again, know who will pay for the signage and particular fixture for trade dress and how often they must be replaced.
- 12. Insurance: Know the insurance requirements for opening the store and also the duration of the insurance.
- 13. Operational hours: What are the hours you are supposed to open the store? Before committing the working hours, ensure that you can meet this obligation. If you fail to do so, the contract could be considered breached.
- 14. Record keeping: The franchisor needs to lay out the records you will keep and what software you will use to keep them. Additionally, they’ll define your right to access the documents and audit them.
- 15. Procurement and supplies: The subject of buying supplies and products. You need to know where your products are coming from, and what fair price you need to pay for them. Should you buy everything exclusively from the franchisor, or are you allowed to use other things not purchased from the franchisor.
- 16. Quality control: Know the quality control requirements for the goods and services being offered to you.
- 17. Personal policies: The policies regarding the staff, recruiting and training process, leaves, bonuses, vacation pay, etc. Carefully examine these details and fully understand all the franchisor’s practices.
- 18. Grand opening: How will be the opening of your business? Will it be grand, or will it be normal? Will there be other company representatives at the opening? How much help does the franchisor offer? Do you need to follow any dress trade for the opening.
- 19. Selling or transferring the franchise: How much control does the franchisor have over your franchise? Does the franchisor have the right to sell or transfer your franchise business?
- 20. Agreement termination: Under what conditions the franchisor or the franchisee is allowed to terminate the agreement before the expiration date? You should know your fundamental legal and financial rights so that you don’t have to face any kind of financial consequences if you fail to live up to the obligations.
- 21. Rights of first refusal: This is a very basic rule that a franchisor could buy your business assets before you offer them to any other party.
- 22. Death and other contingencies: You need to plan for any uncertain event. What happens if you would die? Who is going to take over your business, your spouse, or any other family member? If there is any natural catastrophe, how will the business be rebuilt.
- 23. Indemnification: This is a kind of promise you made with the franchisor that you pay for any loss that happens due to your own wrongdoing or negligence. The franchisor is not responsible for the day to day operation, so they should not be held accountable.
- 24. Expansion options: Discuss the expansion options with the franchisor. Is there any possibility for you to expand the business or purchase another franchise? If yes, then how much will it cost.
- 25. Non-competition agreement: It has two parts in-term and post-term agreement. The in-term part refers to the active period of the franchise agreement. In contrast, the post-term part refers to the period when the agreement has expired or terminated.
Few Negotiation Tips
As a franchisee, you can’t start a business without facing the franchise agreement’s legal aspects. A franchise agreement is written to protect the franchisor’s interests, the franchisee, and the franchise system as a whole.
Most of the franchisors have established terms and conditions of their own in the franchise agreement. The franchisee must sign those terms to buy a franchise and adhere to them without much flexibility. However, a few terms and conditions could be negotiated, and they are:
- Territory rules could be negotiated on certain terms.
- The start-up date.
- The resources and support for the grand opening.
- The training provided to the number of staff members.
- Possible deferral of the initial fee and ongoing royalty payment.
- Fees, rules, and regulations concerned with transferring the franchise to other franchises.
- Franchise’s sale price upon the date of termination.
Nevertheless, the franchise foundation is laid upon proven systems and consistency, which means a franchisor’s willingness to bend the terms and conditions significantly may indicate the system’s instability.
You must seek your accountant and lawyer’s advice as they are the most familiar persons with your situation. You can discuss which franchise terms could be altered to make them more favorable for you. Before signing the agreement, make sure you understand all the implications.