Franchising your business presents many business owners across several different industries with the opportunity to expand their network and achieve exponential growth. It also gives entrepreneurs or anyone that wants to own their own business the chance to empower themselves and be in control of their future.
It is a win-win situation for both the franchisor and franchisee.
However, the franchise contract that is agreed upon plays a major role in how the deal plays out for both. While franchisors that have been franchising their business for several years may have a standard agreement, as a franchisee you must be aware of exactly what the contract entails. Otherwise, you may be in for a surprise later on down the road, only to find you can’t do anything about it due to the legally binding agreement you’ve signed.
1. Not All Franchise Agreements are Negotiable
When going into the discussion for an agreement, typically you would expect the terms to be negotiable. If you feel that a certain clause doesn’t benefit you, you may be able to ask for a reasonable revision. However, depending on the franchise you are planning on purchasing, that may not be an option.
With large, well-established franchises, you will find that there is often little, if any, room for negotiation. If a franchise has been in business successfully for years and has mastered all of the ins and outs of the industry, they are unlikely to change their contract to please a single franchisee. Their agreements are already catered to benefit both parties and the agreement will be offered as-is. But that doesn’t mean you shouldn’t educate yourself on all the components of the contract and seek clarification on anything that you are unsure of.
2. Pay Attention to Franchise Terms
The contract will state the terms of the franchise agreement and break down the whole transaction for you. What you need to focus on most carefully is the following:
- Territory and boundaries
Your franchise location will be allocated an exclusive territory, meaning that another store cannot open within a certain distance. Be aware of your territory- it could heavily impact your sales and profitability if encroached upon.
- Length of agreement:
The time period covered by the franchise agreement will vary, but is typically either 10 or 20 years. There will also be a condition in the contract regarding sales if you later decide to sell the franchise.
- Costs and fees:
This section highlights the initial franchise fee and any ongoing fees, such as advertising and royalty fees, required of the franchisee.
- Support and training:
There is a certain practice that must be followed in every franchised business to maintain the integrity of the brand’s identity. Franchisors provide initial training and support to help you achieve that. Be sure that this is clearly stated in the contract so you know exactly what kind of support you should expect from the franchisor.
- Termination policy:
Ensure you are operating your business in compliance with any rules and requirements set forth by the franchisor. If you fail to do so, the franchisor may have the right to terminate the franchise deal.
3. Red Flags to Look For
Each franchisor may have their own unique way of handling the deal. But with any franchise, there are some red flags that you need to be aware of.
- Pushy franchisors:
The entire process of signing a franchise agreement takes several weeks if you take the proper time to study the contract and do your own research and due diligence. If you feel that the franchisor is pushing you to make the deal or rushing you to sign the agreement, that may be a sign that they are trying to hide something within their contract.
- A limited number of franchisees to call:
Most franchisors who have been in the business for years will have dozens of franchisees you can call for references prior to deciding to sign a contract. This is a great opportunity to get feedback and valuable insight from current franchisees.
Some franchisors may provide you with only a short list of recommended franchisees to contact, so be sure to do your own research. If you find that some locations aren’t mentioned in the list, you may want to reach out to them as well. There could be a reason why they were left off by the franchisor. You have a right to hear from everyone before signing a binding agreement.
- Discounted price: You will rarely find a strong franchisor ever discount their franchise. They know what their business is worth and would rather let franchisees go than to drop their franchise fee. If franchisors are overly eager to negotiate on the terms or price, their franchise might not be worth your time or investment.
When it comes to any kind of agreement, you need to be well aware of what you are getting yourself in to. You also need to trust your gut- if you feel the deal is too good to be true, it probably is.
Purchasing a franchise is a huge decision and a big investment- it will likely affect every aspect of your life. You don’t want to be stuck investing in a franchise that ends up putting you in debt but has you locked in for 10 or 20 years.
So, take your time when making the decision to invest in a franchise system. Do plenty of research, look into multiple franchise opportunities, and seek legal counsel before signing agreements. Be sure you are comfortable with the working capital required to get your business off the ground- don’t enter a contract if you are not 100% prepared.
If you take the time to adequately prepare yourself to select the right franchise for you, it will surely pay off.
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