Like any other type of contract, a franchise agreement is a binding document that specifies the subject matter, object, and other terms agreed upon by the franchisee and franchisor. It also stipulates the obligations of both parties, including the remedies available in the event of a breach. You should also include verbal agreements in the written contract.
Aside from being transparent, the agreement’s provisions must also be specific, leaving no room for interpretation beyond its spirit and letter. Otherwise, you’re only setting your franchise up for failure. It could also create confusion among the people involved in running the business.
If you’re wondering what is a franchise agreement and what to look for in a franchise agreement, you’ve come to the right place. This post will describe this contract and discuss its essential elements and features.
Table of Contents
Why do You Need to Create a Franchise Agreement?
Protection of interest is the ultimate reason you need a franchise agreement. According to Global Franchise, around 80 percent of franchises fail after five years. The reason for such failure is more often franchisor-related than because of the franchise system itself.
It means that if the franchisor understands their obligations because they’re worded clearly, they can comply with what’s incumbent upon them. It lessens the risk of the business failing. If both parties perform their obligations, the business runs smoothly, preventing any party from severing ties and ending the agreement.
What Should you Look for in a Franchise Agreement?
“Ignorantia legis neminem excusat” roughly translates to, “Ignorance of the law doesn’t excuse anyone.” It is a prominent legal principle encouraging people to observe diligence in their actions. This maxim is all the more essential when entering into a binding legal agreement.
Diligence requires understanding the law regulating your rights as one of the parties to a contract. It also means you must take steps to protect your rights without stepping on the rights of others. Before signing any document, it’s best to ask yourself these essential questions: What information is included in a franchise agreement? What are the terms and conditions of a franchise agreement?
To help you satisfy this legal requirement, learn the franchise agreement essentials you should watch out for.
Extent of Personal Guarantees
It’s normal to get excited about opening a new business. However, don’t let your excitement push you to mindlessly sign the agreement without looking at the terms, especially the provision regarding personal guarantees. Most franchisors require that you sign a personal guarantee that will indemnify them if you fail to meet the agreement criteria.
While it’s understandable why some franchisors do this, you still have to be wary of provisions extending the guarantee to your spouse. It’s best to avoid any franchise agreement with these personal guarantees or those with co-spouse agreements, as they will put your personal assets at risk. If you can’t evade them, try to limit the size and duration of your financial exposure.
Trademark and Franchisor Support
When franchising, you’re paying for the trademark. Whether such a brand is recognizable or is still expanding its reach, what’s certain is that it’s worth the price of the agreement. It would help to consider branding since it’s a significant franchise agreement provision. If you take care of this aspect, you’re ticking one item off your have-to-do list.
Analyze your agreement in detail and ensure you get adequate support from the franchisor, even for your point-of-sale or POS system. This is especially true when a third party runs after you for trademark infringement. A good trademark provision must specify that the franchisor will cover all damages and rebranding costs. You’re not responsible for these costs, so never let these provisions fly.
Franchise Transfer
When you sign the franchise agreement, you might be so giddy that you’ll forget about transferring it. After all, every franchisee wants their new venture to work despite the odds. However, it’s a must that you also read the provisions on franchise agreement sale and assignment. Consider the following conditions:
- Transfer fee: This fee must be reasonable and should cover franchisor-associated costs.
- Agreement: Keep it current instead of signing a new one. These agreements differ, so it’s not wise to start over again.
- Supplemental provisions: Future circumstances are beyond your control, so it’s best to have provisions on what kind of support you can get when times get tough.
Renewal
Like the agreement’s transfer clause, you should seriously consider the renewal provisions. This part usually stipulates that the franchisor reserves the right to offer the franchisee a new contract. It’s best practice to express your desire for consistency and ensure the renewal cost is reasonable.
Note that when you become successful in your unit, you wouldn’t want the agreement to be subject to radical changes. It is especially true if you intend to renew for five, seven, or ten more years. It is a business arrangement, and everyone wants to be successful. Never allow others to take advantage of you because you have done exceptional work.
Modification of Terms
It is standard practice for franchisors to want to modernize buildings and units associated with the franchise during the agreement’s lifetime. You’ll benefit from this, too, provided it’s not ridiculously expensive and won’t happen at a busy time.
It’s essential to negotiate a favorable interval between renovations. Ensure that there are no significant disruptions to the business. Also, it’s good to ensure that renovation expenses are capped, and modernizations are system-wide. Otherwise, you’ll bear higher costs than other franchisees because of material and labor cost differences.
What’s Next?
If you want to learn more about franchise agreements, knowing what applies and what doesn’t is the best place to start. An agreement summary is part of any contract. Sometimes, sneaking in new provisions can confuse franchisees and set the tone for following rules that are inapplicable to the agreement.
You can only enforce these regulations if they’re in the outline. Also, either party should refrain from embellishing the summary, even if the clause is more beneficial to one party. It’s best to eliminate any deviation since this will save you time later.
Seek Legal Advice To Protect Your Interest
No two contracts are the same. The general purpose may be the same, but the specific provisions and contract terms and conditions will significantly differ. It’s best to consult with a lawyer to get tailored advice and an accurate interpretation of your franchise agreement. You’ll be investing significant money and time in this business, so you can’t afford to sleep on your rights.
About Carson Derrow
