Start a Franchise Business
Questions You Must Ask Before Entering into A Franchise Agreement
If you want to start a franchise business, there are several aspects of the business you need to consider before making your final decision. For instance, you need to think about the viability of the franchise, its reputation, the market for the product or service, financing…but once you’ve looked into all those things, and you decide to buy in to the franchise, you’re going to have to sign what is known as a franchise agreement.
There are many laws that surround the disclosure of information prior to the sale of a franchise operation, but ultimately one of the most important pieces of information you will receive is what is known as a proposed franchise agreement. When you start a franchise business, this is, essentially, a proposed contract between you (the “franchisee”) and the seller (the “franchisor”) which will govern your business relationship for the duration of the time you do business together. This is not a final document (although it could become one); rather, it is a document for your consideration.
The extent to which the franchise agreement is negotiable varies. Usually, however, there is very little room for negotiation. Therefore, you should be fully aware of the different legal provisions of the agreement before you sign—and if you are not willing to accept those provisions (and the franchisor is not willing to negotiate), then this may not be the business for you.To that end, I would like to discuss some of the most common terms of a franchise agreement, and some of the questions you need to ask yourself to determine whether becoming a franchisee for this operation is right for you, and whether you should start a franchise business.
1. Fee Payments. Do you understand what your payments to the franchisor will be when you start a franchise business, and when you have to make these payments? Are the payments on net or gross profits? If on gross profits (most likely), will you be able to sustain enough business so that you aren’t operating at a loss? Are the terms of the payment fees or the payment formula fixed, or will the franchisor be able to change those payments at their discretion? Will the franchisor be able to impose additional fees after the agreement has been signed? What, exactly, do your initial fees cover—and if your franchise agreement is terminated before the contract expires, can you get some of those fees back?
2. Default/Termination. What will happen if you do something to breach the franchise agreement? Will you be given a chance to correct your fault? If you are given the chance to correct the fault, is there adequate time provided for you to actually be able to accomplish the correction? What kinds of things can trigger a termination of your agreement (do you fully understand the criteria by which the franchisor may feel entitled to terminate your franchise??)?
3. Term of Agreement and Right of Renewal. How long are you able to operate the franchise under this agreement? Will you have the right to renew under the same terms, do you have to renegotiate, or will the terms be whatever is considered to be the current standard? Is the term of the agreement typical for that industry? 4. Territory. Will another franchisee of the same operation be able to open up on the next block, or do you have a defined, protected territory? If there are no restrictions, do you have the right of first refusal to purchase that operation?
5. Supply Sources. Are you required to purchase your supplies from certain vendors? If so, are there limits on how the products or services will be priced? Are the prices required to be at market rates or competitive rates? Does your agreement allow for you to get an independent supply source approved?
6. Selling/Transferring. What happens if you want to sell your franchise or transfer ownership to another person/entity? What restrictions are in the agreement? What criteria will they consider in allowing you to sell to a third party—is it reasonable? What happens if you become ill—or even worse, die? Will your spouse and/or children be able to succeed you in ownership? Does the franchisor have first right to purchase? Will you be subject to a non-compete if you sell?
7. Advertising fees. If you are required to pay the franchisor advertising fees, what assurances are there that the money you pay will actually be used for that purpose? Does this money go into a general account, or a separate account that is used strictly for this purpose? Who decides how this money is spent—do franchisees have any say in the advertising strategy?
8. Franchisor’s obligations. What obligations does that franchisor have to support you when you start a franchise business, and after your doors are open? Will this be sufficient for your needs?
9. Trademark Protection. When you start a franchise business, you are buying into the brand name and recognition of the company. However, you need to make sure that you receive a warranty, in writing, that the franchisor owns the trademark of the business. Further, ask: Have you received a warranty, in writing, that the franchisor will defend you and your business in the event you are sued for the use of the trademark? If the franchisor wants to change the trademark, who pays for the changing of signage and other related marketing items?
10. Renovations. Is the franchisor about to change the “look” of the operation? If so, are you going to be required to spend your money to renovate for conformity? How often is the franchisor allowed to do this? Do you, or the franchisor, bear the cost each time? Is there a cap on how much you will owe?
11. Legal issues. When you start a franchise business, understanding your legal rights and responsibilities is important. What happens if there is a dispute between you and the franchisor? Where do you have to bring suit (and—as is likely, is this a more favorable place for the franchisor?)? Do you have to waive your right to punitive/exemplary (punishment for bad behavior) damages? Do you have to go to trial in front of a judge only, or do you have the right to a jury trial? Does the agreement state that you will submit to mandatory, binding arbitration (so—no trial, no judge?)? If you have to go to arbitration, what are the terms of the arbitration—who pays, what form of evidence may be presented, who oversees proceedings? Are your claims barred if not asserted within a certain time period?
Ultimately, it is likely there will be terms and conditions in the agreement which you simply don’t like. The question will be—do you dislike them so much that you are unwilling to proceed? Or do you believe, based on your previous research, that the rewards outweigh the risks, and you are ready to start a franchise business?
Start a Franchise Business -Contact us today
for help with your Franchise Agreement
Return to Small Business Page
Return to WippLaw Home Page