Franchise agreements are one of the most simple ways to start operating a business that already has a recognized brand name and reputation. Whether you are entering into a franchise agreement to operate a fast food restaurant, a car wash facility or an oil change business, it's important to know a few ground rules when negotiating a franchise agreement.
Franchising is the process of legally allowing an independent operator the use of a particular operating model in business, including the right to sell products or services, and use techniques, trademarks and marketing programs provided by the franchisor, or parent company, in exchange for the franchisee, or independent operator, paying a royalty fee and a percentage of the gross monthly sales.
A franchise agreement outlines just what each party can expect from the franchising partnership, so it is important to read this document very carefully in addition to having it reviewed by an attorney well-versed in franchise dealings. Most franchise agreements bind the franchisor and franchisee together for a set time period, usually anywhere between five years and 30 years, with severe financial penalties if the franchisee terminates the agreement before it expires.
It's important to know the exact length of time you are willing to abide by the terms of the agreement. You must also know what your responsibilities are in terms of liability insurance for any property involved in the franchised business, which is usually always the responsibility of the franchisee. Find out what sort of controls are in place so that your business has a specific franchise territory that is not in danger of competing with numerous franchises of the same business that have been allowed to open in close proximity to your operation.
When negotiating a franchise agreement, be aware of the exact type of training that the franchisor is providing, whether it is on-site expertise for an on-going basis or online coursework or study. Ask yourself if you can live with the standards for products set by the franchisor because franchisees are bound to either purchase supplies and products from the franchisor or use only alternatives which the franchisor approves of which could prove expensive.
In some states, all new franchisees must be offered the same terms as previous franchisees and all terms are non-negotiable. Be sure that your agreement spells out in particular any specific considerations pertaining to the zoning and signage requirements of the area in which you plan on operating the franchise.
Do not sign any franchise agreement in which the franchisor verbally promises you anything or assures you that the details will be handled later. Any negotiations must be documented in writing to be legally binding on both parties and you need to seek court support should the relationship between you and the franchisor turn sour down the road.
Be sure to negotiate specific causes for termination of the contract and be clear about any sales minimums or maximums that are expected of the franchised business. It is often helpful to learn from the mistakes of others, so contact current franchisees to ask their input about items they consider important in the negotiating process.