You’ve made the decision to invest your hard-earned money and time in a new franchise business. Before you sign on the dotted line, it’s important you understand what you’re getting into. Franchise agreements will govern your relationship with the franchisor and impact how you operate your franchise, so they are critical to your success. Knowing that, here are some questions you want to ask when reviewing a franchise agreement:
- How long does the agreement last, and what are the terms of renewal? There is no specific time required for a franchise term, and they usually range from five to 20 years. The biggest thing you want to verify is that the term of the agreement is long enough for you to recover your initial investment.
- Do I have exclusive rights to the area I’m purchasing? There can be many different ways franchise companies divide territories, and territories don’t necessarily have to be exclusive. Make sure you know what you’re getting for your money.
- What fees will I be charged? Common fees include an initial franchise purchase fee, a renewal fee, a transfer fee, royalties, advertising fees, technology fees, and training fees. In addition, franchisees may be required to use certain vendors at their own expense. Make sure you understand all the fees when making your financial projections.
- Is the agreement negotiable? If the agreement is negotiable, this is a red flag that you are not dealing with a strong franchise company. You should want the company’s franchise agreement to be uniform because you want your fellow franchisees to be required to operate by the same terms under which you are operating. This ensures the brand in which you are investing retains its quality and grows its value. Uniformity of franchise agreements also gives franchisees more power as a group.
- Is the agreement one-sided? It is pretty typical for franchise agreements to contain provisions which, on their face, seem unilaterally favorable to the franchisor, such as the ability of the franchisor to make enforceable changes to policies at any time or broad termination clauses. By investing in a franchise, the most valuable asset you are getting is the brand. You do not want all of your hard work into your franchise to be undermined by the actions or inactions of a fellow franchisee. Franchise agreements must be strong to protect that investment.
Contracts are essential and the terms are important, but remember that good franchise systems are built on solid relationships. You want to be a part of a proven, successful system with happy franchisees. Talk to existing franchises within the system you are considering before you pull the trigger.