Franchise Agreements and Contracts
Franchise Agreements and Contracts
If you want to buy a franchise, it’s a good idea to examine their background with a healthy dose of skepticism. It can be easy to get caught up in glossy brochures and earnings promises, but in reality, franchisors and their distributors sell a product and it’s in their best interests to make it as attractive as possible. Here are some areas where you should take a second look.
This is the amount of dollars that a franchisee mentions in its Financial Disclosure Document (FDD) and sometimes deviates greatly from the amount you receive from a seller, advisor, or broker. It is important to find out where these numbers come from, as some companies may use different methods of calculating average gross or net sales. Some companies can divide their franchise companies into top, middle, and bottom earners, and then show separate profits for each area instead of averaging them. In addition, some companies calculate their revenue as gross profit rather than net profit, which indicates a profit before spending and taxes, which can significantly change the bottom line.
Any franchisor who paints pictures of too good education, marketing support, and constant guidance should probably put up a red flag. Review the contract to make sure everything your franchisor offers is listed in the letter on paper. They can woo you with words, but unless it’s in writing, you might be unlucky. Likewise, you should look for the terms in your contract to determine what is required to end your relationship with the franchisor and sell the business. For some owners, you have to sign a non-compete agreement, for others it’s even set so that only they can terminate the contract so you have a deal you no longer want. Make sure you go through all contracts with the help of a franchise lawyer to make sure you’re not fooled by false promises or hidden pitfalls.
If you’ve talked to the franchisor and wanted to learn about the experiences of some current franchisees, you might get a list of phone numbers that you can call. It is possible that this is legitimate and impartial, but it is also possible that these names have been selected because they are guaranteed to give a positive report and will not provide you with the actual details of the operation. A better way to find reliable sources of information is to search the FDD for the list of franchisees and their telephone numbers. Call several of these numbers next to the contacts provided by the franchisor and see if you get a consistent result.
In conversation with area owners
Another thing you should be careful about is talking to other franchisees within the organization who may be in your area. It is possible that thinking about a new franchise that is so close to one’s own may make the owner threatened and force him to give false information about the state of his business in order to discourage competition. Try talking to a sample of franchise owners from a wide range to get a sense of what’s going on with the company.
Follow the trends
Yes, it can look promising to get on the train when the latest fad conquers the nation, but beware of the dangers of a moody consumer. In general, it’s better to work in a proven market that has lasted several years, so you do not risk your savings on anything that lasts no more than one or two seasons. Do your research and try to imagine where your potential business was five years ago and where it will be in five or even ten years. If you can not imagine it, gambling is not worth it.
Next steps in the transaction process
When and if you decide to continue, here are some key points to discuss with your prospective franchisor and franchise attorney:
Get it in writing!
Make sure that you have made verbal agreements with the participating parties that you do not see in the final contract or that you found to be inadequate. Once you have signed the dotted line, it can be difficult to get the others to keep promises they have not made.
Know your obligations
You should ensure that it is explicitly stated what each person is responsible for opening and operating your business. Do you have to contract as an individual or are you allowed to assign the business to an existing business that you own? Are there any restrictions on others in terms of employment, ownership or partnerships with other competitive franchise companies?
If you rely on the fact that you can renew your franchise license after the expiration of your original contract, you should consider whether there are restrictions to this extension. If you lose a lease or fail to meet certain milestones, can you lose your right to continue with your business?
Know your territory
Has a location been selected for your business and is it in an area that you believe will prove beneficial? Can you move if your lease expires or your business performs poorly in a particular area? And is there an agreement that you should not be allowed to expand into specific areas due to overlaps with other existing franchisees?
You should check whether your contract contains a clause that states when and under what circumstances you may terminate and continue your franchise agreement and what consequences are to be expected for early termination. Who has the opportunity to terminate your contract and under what circumstances?
Can I choose my own suppliers?
In certain relationships, you may also be tied to a supplier and not purchase your own goods, although you may find cheaper and higher quality options. Find out what restrictions you have in terms of inventory and whether you can source alternative brands or product types from different suppliers.
Can I sell?
Find out what restrictions are imposed on you when you sell or transfer ownership to other owners. Do your partners have the right to stop such transfers, or can you decide who you sell your business to?
When researching and reviewing contracts, make sure you have a lawyer specializing in franchise law. This legal counsel can prevent significant headaches or even legal disputes in the future of your franchise relationship.
Buying into a franchise is a big step and not something you can take lightly. Make sure you understand all aspects of the agreement and relationship.