5 Aspects to Consider Before Entering a Franchise Agreement

Entering a franchise agreement is a significant step in any franchisee’s business journey. By signing this contract, you take the leap from being a prospective franchisee to the owner of a franchise location. If you want to become a franchisee, you should not underestimate the importance of the franchise agreement. As it is a legally binding document, there can be consequences if you breach its terms. For this reason, you should carefully read and understand the implications of a franchise agreement before signing it. This article will explain several essential considerations prospective franchisees should know before entering a franchise agreement. 

The Franchise Agreement

A franchise agreement legally binds a franchisor, the owner of the brand, with a franchisee, who operates a location following the brand’s model.

Through a franchise agreement, the franchisor grants the franchisee the right to:

• operate a branded business; and
• leverage their established model, brand name, and intellectual property. 

In exchange for initial training and ongoing support, the franchisee pays an initial fee, royalties, and other fees throughout the agreement’s term.

The following sections will outline several crucial aspects prospective franchisees should carefully consider before signing a franchise agreement. 

1. Market Conditions 

No matter what industry the franchise opportunity is in, it is vital to scope out the market conditions. Even if the franchisor can show evidence of successful existing franchise locations, there is no guarantee of franchise success.

Your assessment of market conditions should include location-specific factors. For example, if an existing city-based franchise location is thriving, this does not mean it will be successful in more rural areas. 

Market considerations include:

• population-density; 
• competition; 
• the local demographic (and the size of the target market within this area); and
• whether the target market can access the proposed franchise location. 

2. The Franchised Business’s Background 

All prospective franchisees are responsible for ensuring the franchise opportunity is a sound investment. When evaluating a potential franchise opportunity, the background and history of the franchise business should make up a substantial portion of your research. 

When investigating a franchise business, you should consider:

• its financial background; 
• whether there is a history of legal disputes; and
• the franchisor’s background. 

The amount of information available can depend on the age of the franchise business. Typically, newer franchise opportunities will have less history for you to delve into. 

3. The Training and Support Provisions

Franchisors must offer training and support to their franchisees. The initial training program should prepare you to run your business. It should include training on operations, customer service and the products and services you will provide. 

The franchisor’s support provisions should not end after the initial training. Franchisors should offer you ongoing support, including:

• help with troubleshooting;
• advice;
• updates on significant brand developments; and 
• additional training sessions. 

You must be fully prepared to run your new business. When reading the franchise agreement, find out the amount of training and level of support the franchisor intends to provide. Consider whether you believe this is sufficient. If you require more training or want the franchisor to guarantee further ongoing support, consider negotiating the training and support arrangements. 

4. The Fee Structure 

Every franchise opportunity varies in price. The amount the franchisor requires you to invest can vary based on many factors, including the age and size of the franchised brand, the nature of the business, and the industry in which you will operate. 

The franchise agreement will outline fees, detailing how much the franchisor expects you to invest initially and the payment structure for ongoing costs. Consider whether this is affordable and whether you can also access a sufficient amount of working capital to establish your business. 

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5. Limitations and Exit Considerations 

Franchise agreements may include non-compete clauses, restricting you from opening a similar business during and after the agreement. Additionally, the franchisor may limit your use of their intellectual property and impose strict operating guidelines. Carefully consider how these restrictions impact your business goals.

Another aspect to consider involves the exit terms. Carefully review the termination clauses and whether they suit your plans. 

It is a good idea to seek legal advice about the franchise agreement. A lawyer can carefully review it, helping you to identify and mitigate risks. 

Key Takeaways

Entering a franchise agreement is an exciting step in the franchisee journey. The franchise agreement grants you the right to operate a branded business leveraging the franchisor’s model and intellectual property. However, before signing, you should carefully consider these crucial aspects:

• market conditions specific to your location;
• the franchise’s financial background and legal history;
• the depth of training and ongoing support offered; 
• the affordability of initial and ongoing fees;
• any limitations on your business operations or future ventures; and
• the termination clauses. 

Do not hesitate to seek legal advice to ensure the agreement aligns with your goals and mitigates potential risks.

If you are a prospective franchisee who would like advice about a franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.