What to know when reviewing a franchise agreement

So, you are investing in a new franchise business. Congratulations! At this point, you may be close to reviewing the franchise agreement where the franchisor grants you, as a franchisee, the right to be part of the system. The franchise agreement outlines the partnership between the franchisor and franchisee while providing outlines for how the business will be run. Before you sign the franchise agreement, be sure you are looking it over carefully and consider these points as you’re reviewing the document.

How long does the agreement last, and what are the terms of renewal? There is no specific time required for a franchise term, they usually range from five to 20 years. It’s important to verify whether 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. Be 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 fees and what they’re for when making financial projections.

Is the agreement negotiable? If the agreement is negotiable, this is a red flag. You should want the company’s franchise agreement to be uniform because you want your fellow franchisees to be required to operateFranchise Agreement by the same terms under which you are operating. This ensures the brand you are investing in 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 may seem 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 pulling the trigger.

TWO MEN AND A TRUCK® is the first and largest franchised moving company in the United States. For information on starting your own TWO MEN AND A TRUCK® franchise and to access performance information which is available to prospective owners, click here.

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