Franchise agreements are not evil, but the devil is in the detail
Arguably the most important document in the franchise system, the franchise agreement can be a very weighty, complex and intimidating document for even the seasoned entrepreneur.
It records the relationship between the parties, their mutual expectations and, most importantly, the terms that will bind them for the duration of the agreement.
Six key points for prospective franchisees to consider:
- Peripheral documents: Confirm whether there are any additional documents such as operation manuals or leases that are required or should be read in conjunction with it.
- Fees: Besides the initial purchase fee, look out for other less obvious fees such as royalties, management fees, marketing fees, training fees, membership fees and renewal fees.
- Territory: Franchises usually operate in a specific area and often (but not always) on an exclusive basis. Prospective franchisees should ensure that the territory as described in the agreement is consistent with their understanding. Territorial misunderstandings can have a significant impact on a franchise and be the difference between smooth sailing and barely staying afloat.
- Premises: Physical premises used for the franchise usually require Franchisor approval. Any lease/licence required, will normally be entered into by the franchisee. Be mindful, the term of the franchise is generally subject to the lease/licence continuing. Should the lease/licence terminate, there is a risk that the franchise will also be terminated.
- Right of renewal: To protect the future of their business, franchisees should negotiate a right of renewal. This is often contingent on the franchisee satisfying certain conditions like additional training, refurbishing the premises, purchasing new equipment and paying a renewal fee.
- Minimum Sales Targets: Often used to identify underperforming franchises, failure to achieve these targets may result in the franchisor stepping in to manage the franchise or even worse terminating the franchise. Franchisees should review any targets carefully.
The final word:
Make sure you are comfortable with the content of the franchise agreement before you sign it. Understanding the fine print from the get-go will help avoid unnecessary trouble in the future.