If you are new to the world of franchising, you may not be familiar with some of its common terms, including franchise agreement, franchise disclosure document, turnkey franchise, and royalties. Today, we’re going to take a closer look at what’s arguably the most important of them: the franchise agreement.
This is a contract you (the franchisee) sign with the company (the franchisor) giving you a license to operate a business under their name. It’s detailed, lengthy, and can be confusing. Before you sign, you need to have it reviewed by a lawyer experienced with the ins and outs of franchising.
Franchising is defined by federal law—specifically the Franchise Rule—and governed by the Federal Trade Commission (FTC). While specifics will vary from one franchise to another, franchise agreements typically contain the following:
- Rights Granted to the Franchisee
The franchisor grants you the right to use their trademarks and branding, as well as their business model to follow, for as long as you are a franchisee.
- Length of the Agreement
Franchise agreements usually run for 10-20 years. The franchisor may spell out the specific terms for renewal, as well as the conditions that could lead them to terminate the agreement.
The agreement should delineate the exact boundaries of the territory where the franchisee is allowed to operate. Other franchisees won’t be allowed to operate in your territory in order to eliminate competition.
The agreement should detail your monetary commitments including the franchise fee and other startup costs, as well as ongoing fees including royalties and advertising costs. It may also spell out how much capital the franchisor requires you to have up front.
- Operating rules and restrictions
To guarantee uniformity among its franchises, the franchisor has specific rules for the ways each unit is run. This can include things like hours of operations, specific items and services sold, designated suppliers. even the type of software system you use. The franchisor will also specify a date by which your franchise needs to be up and running.
- Non-Compete Clause
The franchisor may include a non-complete clause stating you cannot work for certain similar businesses while you are a franchisee, or for a certain period afterwards.
- Dispute Resolution
This will establish the state governing any disputes that arise between the franchisor and franchisee. Note that most franchisors require you to agree to settle disputes through arbitration.
- End of Agreement and Transfer Guidelines
If you decide not to renew, there are steps you need to take to end the agreement. The franchisor should spell these out, including how to sell or transfer the franchise. The franchisor will usually retain right of first refusal in the event of a sale.
What You Can Negotiate
It goes without saying these agreements are set up to benefit the franchisor. Most of the terms are non-negotiable – for good reason. The company has developed a proven recipe for success and doesn’t want to change the ingredients and risk a recipe fail—only to please the palate of one franchisee.
However, there are a few places you may find some wiggle room—especially if you are dealing with a newer, or smaller, franchise.
- How you pay your franchise fee
While the fee itself isn’t negotiable, some franchises will allow you to pay it in installments.
- The opening schedule
It’s in the franchisor’s best interest to get your franchise open as soon as possible. But that timeline may not be good for you. This is especially important if you are signing for more than one franchise.
- The length of time of your non-compete
- The cross-default provision
If you are a multi-unit franchisee who defaults on one unit, this language means you will be considered to have defaulted on all of them. This would allow the franchisor to buy back all your franchises at a lower price.
Red Flags to Avoid
Most franchises are reputable organizations who know that in order for the company to make money, you, the franchisee, needs to make money. So, they will do everything they can to help you succeed. Unfortunately, there are some organizations where you should not only question the franchise agreement, but you should also question the company itself. Here are some red flags to look out for.
- Pressure to sign before you are ready or without consulting an attorney
A good franchise will give you plenty of time to decide if this is the right investment for you.
- Limited access to other franchisees
If the franchisor discourages you from talking to other franchisees, or only allows you to talk to certain ones, they may have something to hide.
- Guaranteed profits
Anyone who tries to convince you that you’ll make a certain amount of money is lying.
- A high churn rate
The churn rate is the amount of times a franchise has been resold. This can indicate the franchisor is not supporting its franchisees as it should.
Sign with A Franchisor You Can Trust
One way to know you are signing a good franchise agreement, is starting with a brand you can trust. Home Franchise Concepts has been in franchising for more than 30 years. We’re the parent company of nine different brands: AdvantaClean, Bath Tune-up, Kitchen Tune-Up, Concrete Craft, Budget Blinds, Two Maids, Premier Garage, Tailored Closet, and Aussie Mobile Pet Grooming.
We encourage prospective franchisees to take the time to get to know us. We’re happy for you to talk to as many of our franchisees as you want, so they can tell you what they love about our company. And we understand the importance of having an attorney review the franchise disclosure document before you sign. We want the relationship with our franchisees to be one of trust and openness.
Get Started with Home Franchise Concepts Today
If you’d like to find out more about Home Franchise Concepts or any of our brands, contact us today. One of our franchise advisors will be in touch to discuss what a good franchise agreement looks like and show you how we can get you started on the path to franchise ownership.