So you have taken the plunge and you have decided to purchase a Franchise; you have found a franchise that you would like to invest in and have the finance elements under control. As the legals start to take shape, you are quickly issued with a legal pack, (containing a substantial amount of information concerning your new franchise business) together with a Franchise Agreement. What is this agreement, why is it important and what are some key elements to consider before obtaining professional advice.
What is a Franchise Agreement
The Franchise Agreement is the tool by which the franchisor and franchisee will conduct their ongoing business relationship. This agreement will set out not only the immediate actions required to effect the transaction, such as what you will pay and the start date, but also, what obligations, liabilities and responsibilities each party will take on and be continuously bound by throughout the duration of the relationship, some of which will be beneficial for you but some will be tough.
It is common for franchisees to breach the terms of this Agreement simply because they do not fully understand all it’s terms. This is why having professional legal and accounting advice is important so that you fully understand the terms of the relationship from the outset. It is also important to remember that any agreement can be negotiated – don’t just sign because other have – and it is therefore important to work up an agreement that will be beneficial for both your immediate and long term business plans.
Duration of the Franchise Agreement
One of the key elements initially considered when faced with negotiating a franchise agreement, is how long the agreement will stand for. Firstly, it is important to negotiate a realistic fixed term – a ten or fifteen year agreement may seem inviting as this is a fairly substantial period of time, but these obligations can quickly become onerous for a long period of time should the market or the circumstances surrounding your business change. It is important to ensure the term and its flexibility will suit your immediate business needs but also your business plans for the future, or even selling on the business to make a profit.
Secondly, it is common for franchise agreements to have “renew clauses” and so it can often be preferable for the initial agreement to be for a shorter initial term, but with a renew clause should the franchise business be a profitable one. Upon renewal, you will inevitably be subject to a review of the franchise agreement clauses and so although a shorter term may be better for the purposes of flexibility, when you do come to renew, you shouldn’t expect to take on the same deal as the initial agreement.
Where can I trade from
A franchise will not give you the same flexibility as owning your own business outrightly and so it is important to consider the territory listed in the agreement and the restrictions imposed on you. Your territory will affect both your franchise business and your ability to trade, but also, any potential business ventures you may wish to consider following termination of the franchise agreement, i.e. they will not want for you to set up in competition against the franchisor. You will need to consider what location and area the agreement covers, as you will need to align this with your franchise business plan. You will also need to consider the implications of any non-competing clauses as this will affect your ability to conduct any business in the same area once the franchise relationship has ended.
With all this in mind, please remember that it is important to have a team of professionals to ensure the provisions of the agreement protect your rights to the business you are investing in and things like, what type of premises you operate the business from, the types of products that you can sell, how you market and brand the business. It is important that such issues are considered carefully.
If you are seriously considering taking on a franchise it is recommended that you take early advice to ensure you understand your rights and obligations. Our Kate Ford would be very happy to discuss such matters with you. Please contact Kate on 01842 754151 or firstname.lastname@example.org and she would be happy to help.