Franchising can be an extremely successful and lucrative option for those interested in becoming a business owner without incurring all of the upfront costs associated with buying a business outright. If you’ve been researching business opportunities and decided a franchise is the best fit for you, it’s important to understand the importance of a properly executed franchise agreement. This is the document that will set the stage for all the future endeavors of your new business.
Once you’ve made the decision to invest in a franchise, working out the franchise agreement should be your first step. A franchise agreement binds you (the franchisee,) and the seller (the franchisor) to a long-term business relationship. To that end, it’s crucial to ensure that it’s thorough and covers every detail and possible scenario that might arise to effectively protect your interests and those of the franchisor.
Get it all in writing
Most franchisors will have a standard agreement template, which is a good place to start. However, keep in mind that a generic template will not cover any verbal agreements or asides that have come up based on the due diligence you've performed or any other part of the process you’ve discussed with the franchisor. It is imperative that you keep good records of any verbal or other agreements that have been made as part of your decision to purchase and ensure that those are reflected in the final written agreement.
Never assume that a detail is too small to be included in this initial contract if it could impact the business or your investment in any way. The written agreement will trump any other agreements that have been made verbally should a problem or legal issue arise, so get everything in writing and into the final agreement.
What should be included in the franchise agreement?
There are some topics and details that are common among businesses and should be part of any franchise agreement. Let’s take a look at some of the topics you should expect to find outlined in a thorough and well-executed franchise agreement:
- Fees, including the Management Service Fee. The is typically calculated as a percentage of your profit, but may include a minimum fee stipulation.
- Training of staff to uphold the standards and practices associated with the brand. This includes outlining whose responsibility it is to arrange and pay for such training.
- The length of time covered by the agreement and whether it will be renewable under current terms or require future renegotiation.
- Brand image, including logo use, uniforms, and the appearance of premises. These details will usually be very specific to the standards of the franchise.
- Company policies. This includes things like the hours the franchise is required to be open for business. These details should be thoroughly laid out in the agreement since you will be bound to adhere to the timetable expected by those familiar with the brand. The staffing policy will also need to be laid out in full. This includes the rules regarding holidays, sick pay, recruitment and professional development, for example.
Tools of the trade
When it comes to obtaining the tools and supplies you need to run your new business, franchise ownership can differ from owning your own company. Many franchises require franchisees to obtain supplies and equipment from the company itself (or a specific approved supplier) and outline specifications around what those supplies should be. Terms and conditions of such procurement should be included in this agreement. In some instances, a separate operations manual outlining business practices within the franchise may be available. If so, it is important to obtain a copy and keep up with any regular updates.
Opening the doors
Many franchises have specific requirements around what is expected when you open your doors. If you are taking over an existing location that’s already operating, there will be less to do here. But if you are the owner of a new location, it’s important to understand what is required to host your grand opening and how much of your budget needs to be allotted to advertising ahead of it.
Planning your exit strategy
During the excitement of acquiring your new business, leaving the business will be the furthest thing from your mind. However, a detailed exit strategy is an important part of a well-executed franchise agreement.
This includes outlining what will happen in the event of your death or anything else that renders you unable to effectively run the business. You will need to outline who, if anyone, will take over the franchise on your behalf, and whether or not the franchisor needs to be consulted before the business is passed on to the person you’ve designated as your successor. You must also outline the terms and conditions under which either you or the franchisor can end the agreement prior to the agreed-upon end date.
The franchise agreement is a binding and legal agreement and should be executed with the help of legal counsel. At a minimum, it is important to retain the service of a professional that is well versed in business contracts to review the final agreement before you sign it. With a thorough and properly executed franchise agreement, you can be confident that all of the details have been handled so that you can focus on running a successful and profitable enterprise.
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