Deciding to buy a franchise is a huge decision. Once you have convinced
yourself that franchising suits your character and business aspirations,
have identified the right franchise, done your sums, attended the initial
training and perhaps paid an initial deposit you will be presented with a
Franchise Agreement to sign.
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Typically this agreement could run to 40 or 50 pages and can be a
daunting read to those unfamiliar with commercial contracts. The very nature
of a franchise business structure means that the agreement will be fairly
complex. Remember that this document provides the framework for your
business life over the next seven years or so.
Franchisors, particularly established ones, will rarely change or
negotiate the terms of their standard Franchise Agreement as they will want
to maintain uniformity across all the franchises. However, it is essential
that you understand what you are being asked to sign. Once you have signed
an agreement as a business person (without the cotton wool treatment given
to consumers) you will struggle to persuade a court later that the terms
were unfair or sufficiently unreasonable to be void. You will be stuck with
it! I strongly recommend that you seek legal advice from a commercial
solicitor familiar with franchising.
Key areas include establishing the true cost of the franchise including
ongoing royalties, advertising costs, minimum stock purchases. What location
and territorial rights have been granted? Are these exclusive to you? What
property and equipment is required? What obligations are there on you and
the Franchisor relating to the ongoing operation of the franchise?
Often the most complex area relates to renewal and termination of the
franchise. Are you granted an automatic renewal right beyond the franchise
term of 5 or 7 years? What renewal fee is payable? Can you sell the
franchise on? Usually you will need to give the franchisor first option
and/or a right of veto over the acceptability of any proposed transferee,
often coupled with a % fee. What are the consequences of an early
termination by you if you want or need to get out prematurely? There will
usually be a minimum period with forfeiture of the franchise fee, stock and
possibly other financial penalties and compensation. What if you are in
breach? What circumstances would lead to an automatic termination? Are you
given a period in which to remedy your breach?
Ask yourself some "What if?" scenarios. What if you died or were
seriously ill? What if you failed to meet your sales targets? What if you
wanted to sell product out of your territory? What if a customer sued you
for faulty products? If you cannot answer all your What ifs, do seek more
advice. Don't be afraid to ask the Franchisor these questions. But don't
expect an impartial response. The Franchise Agreement will usually have an
express term preventing any reliance upon representations or claims made by
the Franchisor in the initial presentations or documentation. Much to the
disappointment of many clients who come to us for advice having run an
unsuccessful franchise, this applies particularly to any claims as to how
much money can be earned. Buyer beware!
