When you’ve selected the franchise company with which you’ll spend the next several years of your life, you must sign on the dotted line. Franchise agreements of today have many pages and need to be reviewed by a lawyer with some previous exposure to franchise documents. Franchise laws are different and unique, so don’t use your family lawyer—get an expert. It’s worth the money (usually from $150 to $300) to know exactly what you’re getting into and to be able to ask for changes to the franchise agreement. Most smaller and medium-size franchisors are somewhat flexible on some items and may agree to a few reasonable changes that your lawyer suggests. The big national chains will probably say that everything’s written in stone—sign it as is, or you’re out!
A few things you’ll probably see in the franchise agreement are:
- Royalty. This is a percentage of your gross sales (not profit) usually paid monthly or quarterly. There is often a minimum amount due, even if you’re having a slow sales period. However, you can ask to have a no-fee-due clause if your business is temporarily closed due to weather or disaster. Compare the royalty to others in your industry to be sure it’s inline with them. There should be a five- to ten-day grace period without a late penalty
for royalty payments. Some franchisors offer automatic debits from your bank account so you don’t forget to pay
- Minimum purchase. If you’re selling a corporate product or only approved products from the corporate supplier, you may be required to purchase most or all of these items from agreed-upon sources. There may also be a minimum you need to buy in a given selling period, so make sure you feel comfortable with this.
- Initial franchise fee. This fee is the first payment you’ll make. It opens all the doors, but it’s usually non-refundable, so be very sure of your intentions before you hand over this check. Get rid of any hesitation before you make this payment so you can go full-steam ahead into your franchise. This money will allow you to receive all the secret systems and procedures that the franchisor holds dear, and it covers legal and accounting
costs involved in setting up your franchise.
- Renewal fee. Normally, your purchase of a franchise has a time limit built in—10 to 20 years in most cases, but it can be longer. You may want to be sure that if business is going great, the franchisor can’t refuse renewal and take it away from you. The renewal fee will be less than half of the initial franchise fee, you may be able to negotiate it even lower based on performance.
- Protected territory. You will be given an area or a number of households upon which another of the same company franchise will not infringe. In a retail environment, there should be a certain radius within which another company franchise can’t be placed. Of course, you can’t predict where customers will shop, but most will frequent a store close to their home or workplace.
- Product restrictions. The franchisor will have an established line of products and services that you will be expected to promote and sell. But usually (except with large national companies) the franchisor will permit you to add related items that would sell well in your territory as long as you include the sales in the gross receipts. It’s good to get written approval first so there are no disagreements or problems later.
- Access rights. The franchisor will want to inspect your premises and review your procedures from time to time. A representative will arrive (previously announced or not) to check things out. The rep will look at things such as daily reports, employee records, and store cleanliness and will observe employees in action. The rep may make recommendations on the spot and/or send you a report of the findings within two weeks.
- Non-compete. You’ll need to guarantee the franchisor that you won’t open a similar or competing business once you’re a franchisee. This protects the company from revealing all of its systems and procedures to you, only to have you use them without paying royalties. This non-compete agreement will extend even after you sell the franchise—for anywhere from one to three years—and it can have a distance restriction as well. Make sure that you’re very clear about this to avoid future problems.
These are just a few sections of the agreement you need to be aware of and consider when making your decision to open any franchise. Your lawyer will point out other items for you to consider and review. You should be able to get a draft of the agreement before you make your initial fee payment, so don’t forget to request it. Don’t neglect to read all of it even though it may be long.