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Deciding to buy a Franchise is
a huge decision. Once you have convinced yourself that
franchising suits your character and business aspirations,
have identified the right franchise, done your sums,
attended the initial training and perhaps paid an initial
deposit you will be presented with a Franchise Agreement
to sign.
Typically this agreement
could run to 40 or 50 pages and can be a daunting read to
those unfamiliar with commercial contracts. The very
nature of a franchise business structure means that the
agreement will be fairly complex. Remember that this
document provides the framework for your business life
over the next seven years or so.
Franchisors, particularly
established ones, will rarely change or negotiate the
terms of their standard Franchise Agreement as they will
want to maintain uniformity across all the franchises.
However, it is essential that you understand what you are
being asked to sign. Once you have signed an agreement as
a business person (without the cotton wool treatment given
to consumers) you will struggle to persuade a court later
that the terms were unfair or sufficiently unreasonable to
be void. You will be stuck with it! I strongly recommend
that you seek legal advice from a commercial solicitor
familiar with franchising.
Key areas include
establishing the true cost of the franchise including
ongoing royalties, advertising costs, minimum stock
purchases. What location and territorial rights have been
granted? Are these exclusive to you? What property and
equipment is required? What obligations are there on you
and the Franchisor relating to the ongoing operation of
the franchise?
Often the most complex area
relates to renewal and termination of the franchise. Are
you granted an automatic renewal right beyond the
franchise term of 5 or 7 years? What renewal fee is
payable? Can you sell the franchise on? Usually you will
need to give the franchisor first option and/or a right of
veto over the acceptability of any proposed transferee,
often coupled with a % fee. What are the consequences of
an early termination by you if you want or need to get out
prematurely? There will usually be a minimum period with
forfeiture of the franchise fee, stock and possibly other
financial penalties and compensation. What if you are in
breach? What circumstances would lead to an automatic
termination? Are you given a period in which to remedy
your breach?
Ask yourself some
"What if?" scenarios. What if you died or were
seriously ill? What if you failed to meet your sales
targets? What if you wanted to sell product out of your
territory? What if a customer sued you for faulty
products? If you cannot answer all your What ifs, do seek
more advice. Don't be afraid to ask the Franchisor these
questions. But don't expect an impartial response. The
Franchise Agreement will usually have an express term
preventing any reliance upon representations or claims
made by the Franchisor in the initial presentations or
documentation. Much to the disappointment of many clients
who come to us for advice having run an unsuccessful
franchise, this applies particularly to any claims as to
how much money can be earnt. Buyer beware!
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