If you have decided to go down the franchise route, you need to be sure that the contract you are signing suits your plans and doesn’t tie you in to anything unexpected. To ensure that this is the case, the franchise agreement or contract is all-important. It is usually the only document that sets out all the legal obligations and rights that you have in terms of the relationship between the franchisor and yourself.
First of all, you should make sure that you are given a sample agreement by your franchisor to review and it is advisable to ask a specialist franchise solicitor to look at it and report back to you. You can then be sure that you are entering the franchise knowing all the risks and obligations that you will have to fulfil.
SmallBusiness.co.uk and Élise Billy, founder of franchise law expert EXB Legal, offer this list of things to look out for in the agreement:
Is it comprehensive? – Does the agreement set out everything that you have discussed with your franchisor? Is everything that has been told to you included? It would be wise to avoid leaving anything to chance at the contract agreement stage, as you don’t want any surprises later on. Lastly, is the contract clear on all your obligations and any payments that you will have to make?
Fees – Check the initial fee, then look out for any ongoing fees. Are the ongoing fees fixed or do they vary as a percentage of revenue? This will be important for managing cash flow at a later date, and for forecasting. Are there minimum fees, or performance targets that you will have to achieve? What other costs might you incur?
Supplies – Ask whether you have to buy your supplies from the franchisor or from a named supplier, or if you can choose your own suppliers. If you are bound to a named supplier or your franchisor, will you be given a reduction in price?
Territory – Do you have an exclusive territory? If so, which area does it cover and is it clearly set out, for example by postcode? Is this also the case for any sales that you make? If you don’t have a clearly defined territory, and there are other franchises nearby, it is worth asking how direct competition between the two will be avoided – this is in both your and your franchisor’s interests.
Training and support – What initial training will you receive? Are there obligations on the franchisor for ongoing training and support? What exactly will the training involve? Remember that you may have to plan your time in relation to any training, so it is worth working out a timetable early on.
Term – Ask how long the initial term of the contract is and where this is detailed in the document. Is there a probation period? Once the contract expires, is the agreement renewable and are there costs incurred if you do renew?
Exit – Does the agreement cover your death or your sale of the business? On what grounds can the franchisor terminate the agreement? What does the agreement say about the period after termination or expiry?
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