If you’re considering starting your own business, then franchising may be the solution you’ve been looking for. Starting a franchise with Point Franchise is a great way to minimise the risks while increasing your chances of success. Choose the right franchise, and you’ll enjoy the freedom and flexibility that comes with being your own boss.
Before you sign on the dotted line though, it’s important that you understand the franchise contract that governs the legal relationship between you and the franchisor. It can be daunting trying to understand the complex terms that are contained within the lengthy document, so here are 10 things you should know about the franchise agreement to get you started:
Most franchisors will not consider negotiating their franchise contracts. Therefore, it’s crucial to consult a solicitor that specialises in franchising to review the franchise agreement. This way they can advise you of any clauses that may be unfavourable.
Non-negotiable isn’t a bad thing
It may seem unfair that the franchisor won’t negotiate, but this is for good reason. After all, the main objective of the franchisor is to protect the brand and reputation overall. If the whole franchise fails, then everyone loses out, including you.
It’s full of rules
As well as containing lots of important franchise information, the agreement is also full of ‘do’s and don’ts’. It will very plainly document what will be expected of you as a franchisee and what obligations you have alongside operating your business.
It’s a big commitment
When you’re starting a franchise, you may only be focussed on short-term plans for your new business, but typically the length of the contract term is 5 years. The length of the fixed term can vary, but if anything, the length of the agreement will be more than 5 years, rather than less.
It’s not that easy to terminate the agreement
From a legal perspective, a fixed term means exactly that; it’s fixed. This means that the chances of the franchise contract containing a get out clause for the franchisee are slim. So, bear in mind that the contract will only end as a result of it reaching its full term, the franchisor ending the relationship for a franchisee breach, or when the franchisee decides to sell the business.
Renewal isn’t as it seems
Use of the word ‘renewal’ can cause misunderstandings in a agreement because it’s supposed that the original franchise contract will simply be extended. Very often though, it isn’t this straightforward. When the original term has come to an end, the franchisee will enter a new contract that may have modified terms and obligations. This is, of course, if both the franchisor and franchisee wish to continue with the relationship.
Renewal isn’t automatic
The franchisor gets to decide if a franchisee can renew their contract, even if the franchisee wants to continue. However, it’s unlikely that the franchisor will refuse renewal terms for a franchisee that’s performing well and achieving targets. Provided all obligations have been satisfied during the original term, then it’s in the best interests of all parties to enter another franchise term.
Your territory may not be exclusive
The size and make-up of the territory assigned to you can influence the future profitability of your business. Establish whether you’re being granted exclusivity for your territory, or not. If you’re starting a franchise in a busy town or city and you’re not granted exclusivity, then you run the risk of the franchisor giving rights to another franchisee to open a unit within your area.
It may contain hidden fees
The franchise agreement should clearly document the fees associated with buying the franchise. A breakdown of the costs may not all be detailed within the fees section of the contract though, so make sure you review all the franchise information. You don’t want to be hit with any hidden charges after you’ve signed. If you’re unsure about the fee structure, or what the royalty and other ongoing fees are, make certain you discuss this with the franchisor.
It can tell you more than the franchise terms
The information included in the contract alone will probably not give you a gut feeling about the opportunity one way or the other. But the interactions and discussions with the franchisor during the agreement review will. You shouldn’t make decisions based on gut instinct alone, but if it doesn’t feel right, then it may be worth walking away from the franchise.