What you need to know about franchise agreements

As a franchise owner the franchise agreement is one of the most important documents you will sign. It is essentially a legally binding agreement between you and the franchisor that sets out the extent of the rights to be granted, the territory in which those rights apply, the exclusivity of the rights in the territory, and the term in which the rights exist.

Due to the importance and the fact that this is a legally binding agreement, it is a good idea to get a business lawyer or, more specifically, a solicitor who deals with franchising, to look over the franchise agreement before signing. Another good place to go to for professional help is franchise consultancy firms, which often have experience in creating these agreements and can offer advice and guidance. As well as this, sample agreements can also be found online.

Although it is important to get expert guidance to help you understand the franchise agreement, you should appreciate that it is usually a standard document drawn up by the franchisor and signed by every franchise owner in the network. Due to this, most franchisors will be unwilling to negotiate the finer points of the contract and instead will view signing it as a ‘take it or leave it’ decision. Instead of amending specific points, the experts will be able to advise you on whether the agreement in general is a fair to you, the franchise owner.

Once you have signed the franchise agreement you will be legally committing yourself to running the franchise for a number of years, so it is essential that you hold back if you are not fully confident with the agreement.

There are a number of ways that the franchise agreement can include or exclude conditions that may not immediately impact you, but which can be costly in the long-term. For example a franchise agreement should set out how the agreement can be extended at the end of the specified term, should you chose to do so. This is important because you do not want to build up your business, a customer base, and brand recognition over a number of years for the franchisor to claim the lot when the agreement ends.

As well as setting out the franchisor’s obligations, the franchise agreement will also set out what the franchisor expects from you as the franchise owner. For example the franchisor may layout guidelines for which suppliers you can use or the cost payments required for national advertising campaigns. It is vital that you understand and comply with the obligations you have agreed to, or else you could be breaching the contract.

The franchise agreement is basically the foundations on which you and the franchisor are going to build your business partnership on. It is essential, therefore, that you are completely satisfied with the terms of the contract, both your obligations and the franchisors, before signing.

Written by Derin Clark