A Franchise Agreement is a legally binding agreement between you, the franchisee, and the franchisor. It sets out the terms of the relationship, what can and can’t be done, who is responsible for what, what the royalty payments are and so forth.
The Franchise Agreement is an important document that will govern the franchisor-franchisee relationship, particularly if there is a breakdown of communications.
Most Franchise Agreements will (usually) operate over a five-year term, which is renewable for another five years (or however long the initial term was). What this means is that when you buy into a franchise, you’re initially buying into it for a set period.
At the end of that five-year period you can either shut it down and walk away, sell it or renew for another period. You don’t have an automatic right to renewal as it’s at the discretion of the franchisor, however if you’ve been a good franchisee then there’s absolutely no reason why they wouldn’t want to renew. When a franchise is due for renewal, you are not required to pay a franchise fee again.
Franchise Agreements across the industry are similar in nature. When comparing two side-by-side you will find that they have a similar structure with similar terms. This is because franchises, regardless of industry or business model, operate in a comparable way.
You, the franchisee, has an exclusive or non-exclusive territory where you will operate the franchisor’s business model according to their operating manual. You will be licensing their brand name and in return you will be paying an upfront franchisee fee and ongoing royalty.
As part of this ongoing royalty, you will be receiving the support of the franchisor. The Franchise Agreement will outline what this support consists of. Should you decide to sell your franchise, the Franchise Agreement will highlight the process for doing so and the terms under which this takes place.
The Franchise Agreement will outline the procedure should the relationship not work out between you and the franchisor. It will outline who needs to do what and what is expected from each party. As I’m sure you can tell, the Franchise Agreement is an important document.
It’s good practice to utilise the services of an experienced, independent franchise attorney to review the Franchise Agreement on your behalf. They will discuss the franchise with you, then go through the terms of the agreement, highlighting any concerns and reporting back to you in a digestible report. A franchise attorney will walk you through any concerns that they have and highlight anything that you need to go back to the franchisor with. You will then discuss these items with the franchisor and, if necessary, create a side note.
One thing to keep in mind is that very rarely will a franchisor change the fundamentals of a Franchise Agreement. At best a side note will be added, but that’s it. If a franchisor starts changing key elements of the Franchise Agreement then be very concerned, for it’s likely that they are primarily after your money.
A good franchise will not change any core elements the Franchise Agreement, because it will compromise the entire franchise network. If they do it for one, then they must do it for all. We are not over exaggerating when I say it can cause a mutiny within a franchise. Key factors such as royalty payments and schedules must be taken as a cost of going into the franchise and that’s that.
Therefore, it’s incredibly important to use a franchise attorney and not a generic commercial lawyer. A franchise attorney will know what can and can’t be changed in a Franchise Agreement and will tell you where you have room to negotiate, should you need to negotiate at all.
It’s common for a Franchise Attorney to come in and, not fully understanding the franchise industry, try changing things that just can’t be changed. It can result in a very expensive process for you and, in some cases, a breakdown of communication between the franchisor.
Once you have reviewed the Franchise Agreement with a franchise attorney, you will normally have a ‘legal review’ with the franchisor.
The legal review is where you get to raise any objections highlighted by the Franchise Attorney, clarify certain key points and ask any questions related to the Franchise Agreement. A good franchisor will make sure that you are clear on what’s involved and what’s required from you. They want to be completely transparent with you and for you to go in with no misconceptions about what’s involved.