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Joining a franchise is a thrilling prospect for entrepreneurs. Amidst this excitement, it is essential to recognise one of the most important steps – thoroughly reviewing the franchise agreement. As a franchisee, signing this agreement binds you to the franchisor’s terms. Knowing what to look for will equip you with the power to negotiate unfavourable terms. This article will explain some key elements you should consider before signing the franchise agreement.
What is a Franchise Agreement?
The franchise agreement is the contract between you and the franchisor. It gives you the right to operate under the umbrella of the franchised business by using its:
- name;
- branding;
- operating system;
- and products.
The agreement will include the obligations of both you and the franchisor.
Importance of the Franchise Agreement
The franchise agreement is one of the most critical documents in a franchise. It is legally binding. Therefore, failing to follow its terms can lead to legal implications.
Within the agreement, the franchisor may seek to limit particular terms. For example, they will want to limit how you can use their trademarks and how long you can use them for. Restrictions like these allow franchisors to protect their brand’s reputation. However, it is crucial to remember that the agreement should protect both you and the franchisor.
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Key Terms
You must read the franchise agreement thoroughly, as this will look different for each franchise. The contents may vary depending on the type of franchise and the industry it operates within. The following is a list of key terms that should be included in any franchise agreement.
1. Training and Support
The franchisor must offer you a program of initial training to allow you to begin your new role. The franchise agreement should stipulate the format and duration of this training. You should also have access to support. This should be from either the franchisor or a separate support team.
2. Duration, Renewal, and Termination
The franchise agreement will run for a specified period. The franchisor will set out this duration within the document, including the conditions for renewal and termination. Additionally, check the agreement to determine if the franchisor will allow you to sell your franchise.
3. Fees
Check the fees you will have to pay to the franchisor. Look for:
- the amount of the initial franchise fee;
- the ongoing fees you will pay to the franchisor; and
- any other costs you may incur, for example, marketing costs.
4. Territorial Exclusivity
Having exclusive rights to a particular area is in your best interest. If the terms of the agreement allow another franchisee to establish the same franchise at a nearby location, you can lose business. Consider whether you have exclusivity, or a large enough territory to operate within.
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5. Non-Compete Clauses
The franchisor may specify that you are not allowed to open a similar business for a certain amount of time after leaving the franchise. For example, if you join a gym franchise, you may not be allowed to open a gym business for five years after your franchise departure. Check the non-compete terms in your agreement.
Negotiate the Terms
When joining a franchise, the franchisor will first provide you with the franchise agreement to read. Ensure you take time to read, digest, and understand the contents of this document. You can also seek legal advice about this to ensure that the opportunity is fair and legally sound.
You should review the agreement and franchise disclosure document thoroughly. Then, you can ask questions and negotiate the terms with the franchisor.
Franchise agreements solidify brand standards and consistency across the system, so franchisors might resist any changes to them. However, do not be afraid to negotiate! You can be proactive by:
- identifying your needs: if you require more support than the agreement offers, negotiate for it. A successful franchisee benefits the franchisor too; and
- reviewing all terms: carefully examine every term, including those mentioned above. You should ask yourself: are these fair and workable for my situation?
Key Takeaways
The franchise agreement is one of the most important documents of your franchise. It is essential to read it carefully, consider the terms the franchisor has set, and negotiate where necessary. Accordingly, aspects you should look out for include:
- Training and Support: Ensure the agreement provides a comprehensive training program to equip you for success. Ongoing support from the franchisor is also crucial.
- Duration, Renewal, and Termination: Look for the agreement’s duration, renewal options, and termination clauses.
- Fees: Be aware of the initial franchise fee, ongoing royalties, and any additional costs.
- Territorial Exclusivity: Negotiate for exclusive rights to a specific territory to avoid competition from other franchisees.
- Non-Compete Clauses: Understand any restrictions on opening a similar business after leaving the franchise.
By negotiating these key areas, you can ensure the agreement fosters a thriving franchise that benefits both you and the franchisor.
If you need help with your franchise agreement or joining a franchise, 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.
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