What Is a Franchise Agreement Review?
A franchise agreement is a legal document that establishes the terms and conditions between the franchisor and the franchisee. Therefore, a franchise agreement review is highly recommended to ensure you know exactly what you are getting into.
Franchising is a popular business choice for many people around the world. It allows would-be entrepreneurs to build a business using a proven formula and to provide customers with access to a brand they already know and trust.
However, while many franchise agreements are similar, most have widely varying requirements, expectations, and terms and conditions for the franchisee. Suppose franchisees don’t abide by the terms of their franchise agreement. In that case, they could be removed from the program – meaning they would no longer be able to use the name and branding of the franchisor.
Some franchise agreements might be too restrictive or heavily weighted in favor of the franchisor. This is why it’s important for people considering becoming a franchisee to have a professional franchise agreement review.
During a franchise agreement review, a lawyer or business specialist with a high level of knowledge of franchising will review the legal document provided by the franchisor and ensure that there are no clauses or restrictions that might put the franchisee at a disadvantage in terms of one or more facet of the business.
Here is an article that provides more information about franchises.
Key Terms in a Typical Franchise Agreement
Becoming a franchisee and being allowed to use the business model, brand, and franchisor is a complex process. There are many things that you will need to agree to. The franchise agreement will include a variety of terms and clauses, but some of the most important are:
- Terms related to the use of the trademark, logo, and branding
- The territory that you are allowed to operate in
- Whether you are entitled to have a single location, many locations, or exclusive rights to a region or area
- Standards, procedures, rights, and responsibilities of both the franchisor and the franchisee
- The duration of the franchise agreement and what the procedure is to renew or extend the term
- Payments that the franchisee will make to the franchisor
- What kind of assistance in training, advertising, and operational procedures can the franchisee expect from the franchisor
- When and how the franchisee or franchisor might terminate or transfer the franchise
These terms and conditions can vary widely from one franchisor to another. Some may be more flexible, while others have rigid or specific requirements. Therefore, it’s important to understand your franchise agreement and what kind of restrictions and rules you might face.
If a franchise agreement does not align with your needs or vision, you might need to look for another opportunity that is more suited to your needs.
Here is an article with a sample of clauses in a franchise agreement.
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What is an FDD?
An FDD is a Franchise Disclosure Document. It sets out many of the terms, expectations, and requirements of the franchisor, such as:
- Who the franchisor is, and who their key contacts are
- Information about their franchise program, including their experience in managing a franchise program
- Fees that franchisees are required to pay to join the franchise program and any ongoing fees and commissions on sales
- Required investment, purchases, and property and location specifications for franchises
- Territory rights for the franchisee
- Information about other franchisees
- Profitability data
Once the franchisee has received an FDD from a franchisor, they have a 14-day cooling-off period to review the document and decide if it’s the right opportunity. The FDD might also include contact information you can use if you have any other questions about the franchise program.
Here is an article to learn more about an FDD.
3 Types of Franchising
There are three main types of franchise:
- A master franchise agreement
- An area representative agreement
- An area development agreement
The primary difference between these agreements relates to where each franchisee may operate.
Who Should Review My Franchise Agreement?
Since a franchise agreement is a legal document, the best person to conduct a franchise agreement review is a lawyer who specializes in this facet of business law.
Lawyers with experience reviewing franchise agreements understand the terms and terminology used in this agreement and can spot potential problems quickly. For example, they can advise potential franchisees if the agreement they are considering is too restrictive or if the franchisor has too much control over their business and earning potential.
How Much Does It Cost to Review a Franchise Agreement?
The cost to review a franchise agreement varies widely from one law firm to another, so it’s a good idea to contact a few specializing in this type of law before deciding whom to trust with your franchise agreement review.
Most law firms who offer franchise agreement reviews will charge an hourly rate, and they will usually be able to give you some indication of how many hours they expect will be needed.
This is a small price to pay, though, and will be significantly cheaper than trying to get out of a lousy franchise agreement.
Common Legal Issues in Franchising
A franchise is a unique business relationship between the franchisor and franchisee, and there are many legal considerations you will have to weigh before choosing which franchise is right for you.
However, there are a few common legal issues that can make or break a franchise, such as:
- What are your rights as a franchisee are
- How transparent and honest the franchisor is about the business and profitability potential of the franchise
- What kind of training and support will you receive, and how easy will it be to access
- The upfront and ongoing costs related to the franchise
- Non-competition agreement – including whether you can continue to run a similar business in the event your franchise agreement is terminated
- Responsibilities related to site location and development – who will find the site for your franchise and equip it to operate?
- The legal and business standing of the franchisor and their track record in the industry
These issues can profoundly affect your franchise business, so it’s important to take the time to understand them thoroughly.
What Can You Negotiate in a Franchise Agreement?
It’s not always possible to negotiate the terms of a franchise agreement, and often, the larger and more established the franchisor is, the less room for negotiation you will have.
However, there may be situations where you can negotiate various aspects of your franchise agreement, such as the upfront and ongoing fees and commissions you must pay, where you are allowed to operate, and what your territory will be.
You might also want to negotiate any franchise agreement terms that are too restrictive, including ongoing non-compete clauses.
It’s also a good idea to negotiate your renewal rights, get the most favorable deal, and ensure that the franchisor has limited rights to acquire your business should they choose to.
Many small details can make or break a franchise agreement, and it’s always a good idea to negotiate as much as you can so that it favors you as much as possible.
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