A franchise agreement is a contract between the franchiser and the franchisee and should balance the interests of both parties. These agreements are written up by lawyers, often at great expense to the franchiser. As a result, these documents are often drafted shedding a more favorable light on the franchiser. The agreement is designed to manage every aspect of the business relationship, and as a result these documents can be a bit demanding and overbearing. The franchisee more or less has to take it or leave it. More obscure franchises tend to allow for more opportunities to negotiate in favorable terms for the franchisee. There is no standard franchise agreement. Each contract is drafted to suit the individual situation. But we can review some of the basic terms of most franchise agreements.
There are always basic considerations when making a major purchase. Make sure you have gathered as much information as possible. Make sure the franchiser is reputable. Finally, make sure to get approval of the purchase from your lawyer and/or accountant. Also, make sure the decision is made from the head and the heart. If you are devoted to the business it is more likely to thrive than simply survive.
Considerations
The parties involved: is this a two-party agreement or is there a third party regional franchisee involved? What are the tax implications of a foreign-based franchiser company?
What is being granted and when does the grant expire?
What are the terms?
What is the length of time?
Is the agreement renewable?
Is the exclusivity absolute?
Protected versus Exclusive territory: is there a “right of first refusal” if the franchiser wishes to open another franchise in the territory or does the franchiser have the right to use other channels of distribution besides the franchisee in the territory?
What are the renewal terms?
Does the franchiser hold the lease and does he or she have the right to take over the lease to cure defaults?
If the premises have yet to be built, are development costs fully understood, and is it clear who pays for what?
Is there a training program, and who pays for the program and the training materials? Is there ongoing assistance available and at what cost, if any?
Are there restrictions on the business interests of the franchisee?
Is there an upgrade obligation involved in the agreement?
If there is contracted bulk buying involved, are the savings worth the cost?
Consider the size of the franchise fee, and also the royalties agreement – how is it determined and at what cost?
Does the franchiser require audited financial statements?
Is a contribution required in addition to the advertising royalty?
Are there restrictions on the sale/transfer of the franchise?
If there is a remaining obligation after the transfer, how will this be dealt with?
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