Starting a business can be far more challenging than maintaining one with a proven track record. If you want to skip the agonizing process of building a business from the ground up, then you might be better off buying a franchise instead. However, this type of business model doesn’t come without risks. That said, below are five vital tips on how to review a business franchise agreement.
But first things first…
How Does Franchising Work?
Franchising is a way for large companies to expand their businesses. At the same time, it’s also a means for aspiring entrepreneurs to jumpstart their careers. The franchise owner, commonly known as a franchisor, sells part of their intellectual property to the buyer or franchisee. The franchisee can then start doing business under the name, trademark, or brand of said company. To quickly illustrate, you can only own a McDonald’s fast-food restaurant after legally purchasing a McDonald’s franchise.
What is a Business Franchise Agreement?
A franchise agreement is a legal document that binds a franchise owner to a franchisee. It outlines the terms, obligations, expectations, and responsibilities of both parties. In other words, it serves to protect the owner’s brand as well as your investment as a franchisee. This agreement also outlines any fees the franchisee must pay the franchisor.
Reviewing a Franchise Agreement
In general, the franchisor sets the ground rules here. This arrangement is understandable since it owns the desired rights and intellectual properties. Although the agreement must uphold the company’s standards and best interests, it also needs to be fair and profitable for the franchisee. That said, you should review the agreement before committing, paying fees, and, most importantly, signing the document.
1. Get Legal Help
When you need help with your pipes, you call the plumber. In the same manner, when you need to navigate the ins and outs of a franchise agreement, you should contact a franchise lawyer. This expert specializes in dealing with legalities surrounding franchise transactions. A franchise lawyer can give you solid advice on negotiating the deal. They can also tell if something’s not right, or explain to you how the partnership will likely pan out in the long run. It’s worth having a professional guiding you instead of diving blindly into such a significant investment all by yourself.
2. Be Careful When Negotiating
Unlike seller-vendor contracts, which are quite flexible, franchise agreements are typically set in stone. Popular franchisors usually have a list of buyers lined up to buy into the franchise. As a result, it won’t matter much to the franchisor if you don’t proceed with the partnership.
However, if you’re dealing with a newer franchise, they’re usually more accommodating regarding terms. Businessnewsdaily.com shares some items that you can negotiate, such as:
- Territory: Rights to build on a particular area where you’ll meet less competition, thus increasing the chances of the business’s success.
- Grand opening assistance: If the franchisor agrees, they can help promote your business’s grand opening to boost sales and influence.
- Transfers: You can request to have the ability to transfer your franchise to an inheritor or real estate.
Notice that the items above don’t involve negotiating the fees. That’s because prices for most established franchises are already final. It’s a take it or leave it deal.
3. Know the Difference Between ‘Shall’ and ‘May’
Once you get to read the agreement, you’ll notice that the words shall and may commonly precede the terms. It usually pertains to what the franchisor can and will do for your branch. ‘Shall’ means that the franchisor will have to honor the obligation no matter what. On the other hand, ‘may’ means something they can provide but are not legally obligated to keep. By making a clear distinction between these two words, both parties will be able to stand on common ground when it comes to expectations.
4. Watch Out for Red Flags
Not all franchises are equal in quality. Some can even be fraudulent and are just waiting to rip you off. To avoid future problems, you should be careful when:
- The franchisor rushes you to sign the agreement. Urgency usually indicates a hidden problem with the contract. Buying a franchise is not a simple investment. It requires careful consideration, so take your time.
- You’re told not to contact fellow franchisees. Why? It’s only understandable that you’d want to speak with others who have worked with the franchise. Seeking out other franchisees shouldn’t be a problem unless your franchisor is hiding something.
- Lawyers are not part of the deal. This is a huge red flag that you shouldn’t miss. Some companies might tell you that working with a franchise attorney is a waste of time and money. You know that’s not true. If you proceed with a contract without having a lawyer review it, you might be investing in a mess you can’t legally reverse later on.
5. Consider Your Gut
How accurate is your gut instinct? Gut feelings arise from the accumulation of knowledge from one’s life experiences. It’s not a hunch but more of a calculated guess. Unless you’re dealing with an established brand, don’t commit just yet if you notice something fishy going on with the deal. It never hurts to investigate some more. If your franchisor has nothing to hide, they’ll respect your intuition while working to erase your doubts.
Business franchise agreements should be fair for both parties. Franchisors may have the upper hand, but you shouldn’t forget your rights as a business partner. Good franchisors will treat their franchisees right since they’re also vital in scaling their businesses.
