Before You Sign on the Dotted Line

Deciding to buy a franchise is a life-changing decision. Once you’ve determined that franchising suits your personality and business aspirations, identified the right franchise, done your math, attended the initial training and, perhaps, paid an initial deposit, you’ll be asked to sign a Franchise Agreement.

Typically, this agreement can run 40 or 50 pages, and be daunting to read if you’re unfamiliar with commercial contracts. The very nature of a franchise business structure means that the agreement will be fairly complex. And, since the average length of a franchise contract is 10 years, be aware that this document provides the framework for your business life for the foreseeable future!

Franchisors, particularly established ones, are seldom willing to change or negotiate the terms of their standard Franchise Agreement since they want to maintain uniformity across their entire franchise system. All the more reason that it’s essential for you to understand what you are being asked to sign.As a businessperson, once you’ve signed an agreement, you’ll be hard-pressed to persuade a court later that the terms were unfair or sufficiently unreasonable to be void. You’ll be stuck with it!

For that reason, I strongly urge you to seek legal advice from an attorney who specializes in franchise law.

Key objectives during your review of the contract include establishing the true cost of the franchise including ongoing royalties, advertising and other applicable charges. You need to understand exactly what location and territorial rights you’ve been granted and whether they are exclusive to you? What property and equipment is required? What your obligations are, and those of the franchisor, relating to the ongoing operation of the franchise?

Often the most complex area relates to renewal and termination of the franchise. Are you granted an automatic right of renewal beyond the initial specified term of the franchise? If so, what is the renewal fee? Can you sell your franchise to someone else? If so, you will usually need to give the franchisor first option and/or a right of veto over the acceptability of any proposed transferee, often coupled with the payment of a percentage fee.

What are the consequences of an early termination on your part if you want or need to get out prematurely? There will usually be a minimum period with forfeiture of the franchise fee and, possibly, other financial penalties and compensation. What if you are in breach of contract? What circumstances would lead to an automatic termination? Are you given a period in which to remedy your breach?

It’s also useful to ask yourself some “what if?” scenarios. What if you died or were seriously ill? What if you failed to meet your sales targets? What if you wanted to sell product outside of your territory? What if a customer sued you for faulty products?

If you cannot answer all of your what ifs, I strongly urge you to seek more advice. Don’t be afraid to ask the franchisor these questions. But don’t expect an entirely impartial response.

While most established franchisors are honest and reputable, it’s still important for you to be vigilant and thoroughly understand the terms that you’re agreeing to.

In franchising, as in every other financial transaction, “buyer beware” is advice well taken.