Franchise Agreement : 5 Elements to Check Before Signing

The underlying basis of any franchising business is contained in the franchise agreement. This is a legally binding contract joining franchisor and franchisee in a business relationship.

Any franchise agreement is potentially a very detailed document with legal provisions and schedules  difficult to understand at times. We suggest to seek advice from a lawyer with franchising experience.  Also try to read it personally  beforehand and comprehend terms for fruitful discussion with lawyer. This enables to take a measured approach before signing any contract.

Let us not forget that one of the greatest attractions of franchising is the standardization of business process and operation, which also includes standardization of franchise agreement. This often leads to little room to discuss or negotiate on terms and conditions within franchise agreement itself. However there are occasionally some room for discussions in one part of agreement typically call “schedule” of specific “provisions” which contains particulars of franchise to be granted.

A franchisee should also remember that any franchise contract is a conditional grant usually limited by time. This means that franchisor does not transfer the ownership of brand, system or operational know how to franchisee. Simply put, it gives only access to franchisee to these aspects which can be terminated or withdrawn by franchisor as per terms of agreement.

Here are the 5 provisions open to discussion for mutual satisfaction of franchisor and franchisee.

 Territory Allocation

A scope of the agreement will generally outline whether it’s on exclusive or non- exclusive basis. If non-exclusive then a “provision” will clearly define the territory allocated either through a map or other means indicated in “schedule”. The provision will also clearly define the circumstances under which franchisee can operate outside allocated territory or other franchisee can enter into their territory.

Premises &/ Or Equipment’s.

This is typically applicable to site based franchise like F&B, retail, vehicle repair garage etc.  The provision specifies fit-out requirement, layout, appearance or fitness for required purposes etc. This provision may also include franchisors approval prior to commencement of operations or conditions surrounding renewal, refurbishment or upgrading, change in layout as per franchisors requirement.

 Nominated Manager

The nominated manager provision generally requires a real person with specified qualification or credentials. The nominated manager holds responsibility and supervises operation of the franchise in accordance with laid out guidelines. The provision may include that franchisor approval is required to terminate or replace and franchisor has right to reject the nominated manager as proposed by franchisee.

 Intellectual Property

The agreement will set out the terms of intellectual property; normally it also stipulates that any intellectual property developed by franchisee will become property of franchisor. This means that if franchisee develops any idea to improve product or service which franchisor rolls out across the network; the franchisee may not be in any position to financially benefit from the same.

 On-going Payments and Fees

These are generally the royalty and marketing fees. Royalty fee are charged for on-going support, marketing fee (generally pooled in central fund for brand marketing) or for continue use of franchisors intellectual property for the term of franchise.

These are generally percentage of sales turnover (Not profit) or fixed fee (irrespective of sales etc.) paid on weekly, fortnightly or monthly basis. This may vary from one franchise system to another and generally range from 4% to 10%. This essentially leads to fee  going up with increase of turnover (which could be due to inflation or cost of local licenses etc.). Secondly agreement may insist on certain type insurances wherein franchisors must be named as co insured.

Conclusion

These are some of the elements which franchisors are open to discuss and negotiate depending upon market potential. The franchisee should also carefully consider the following;

1. Confidentiality agreement terms.
2. Inspections, audit reports and financial statements.
3. Buy out, breach and termination, non-renewal, transfer or restraint provision.
4. Death and disability of nominated manager or owner and so on…

It is advisable to research beforehand  from available  resources ,  do due diligence and take measured approach before signing any franchise agreement.