FRANCHISE BUSINESS IDEAS : 10 Things About Franchise Contracts

Many people are turning to owning a franchise business as an alternative to the standard corporate job. They’re attracted by the empowerment this business strategy represents, and the control they’ll have over their own destiny.

In this regard, a franchise contract is like a prenuptial agreement- not very romantic, but you'd better understand it before you sign it. Here are five of the 10 important things you need to understand before signing your franchise contract.

1. Agreements with strong franchise companies are typically non-negotiable. Most prospective franchisees are looking for a proven, successful system, where current franchisees are happy with their decision to go into the franchise. This is what I call a strong franchise company.

Strong franchise companies have learned that the easiest way to administer their system with maximum benefit is to have each franchisee on the same program; this begins with a uniform contract. Don’t be surprised if you’re told the franchise agreement “is what it is,” and that you have to sign the same contract as every other franchisee if you want to become one yourself.

If there are provisions of the franchise agreement that prompt questions or concerns, ask the franchise company to provide you with a letter of clarification, addressing the specific point or points you have an issue with. This technique allows a level of comfort to be created, even with a non-negotiable contract.

2. A franchise company’s willingness to negotiate substantive provisions of its franchise agreement should be a warning sign. This fact seems counterintuitive to most prospective franchisees, but this is a red flag when typical franchise agreements are non-negotiable.

If everything is open for negotiation, you have to question the company’s confidence and level of certainty concerning the validity of its brand and operating system. If those aren’t strong, what is the value you’ll receive in exchange for the fees you’ll pay as a franchisee in this system?

As part of your due diligence, always ask if a franchise company is willing to negotiate the terms of the franchise contract. Initially, most will answer negatively, but you need to test this. Ask something along the lines of “Do you mean that if I literally found only one word in the entire agreement that needed to be changed, you wouldn’t even consider it?” If officials waffle, and say they’d consider changing a single word, they are really saying, yes, the contract is negotiable, and you should get expert assistance to negotiate accordingly.

3. Franchise agreements are typically unilateral in nature. When you read the contract, even if you’re not an attorney, you will realize it is written from the company’s perspective. It may not seem fair, or reasonable, especially given the probability that the franchisor won’t negotiate language or terms, but that’s almost always the case.

This dynamic is not as negative as it may seem- at first. One of the main goals of the franchise agreement is to protect the franchise system as a whole. This includes the brand, integrity of the operating system and franchisees’ businesses in the aggregate. The franchise company believes it knows how to accomplish this task best, and that is how the contract is written. If you’re not comfortable with that approach, find a different franchise company with a different contract you are more comfortable with.

4. The franchise agreement is full of "must-dos." Within the very first reading, you will see that the franchise contract contains a lot of rules. It will very clearly outline things you must do regularly in conjunction with operating your business.

These rules can help you understand and prioritize while operating your business to attain success. That is why specific rules are being spelled out in the contract- so there‘s no chance for misunderstanding their importance.

To verify any contractual "must-do" rules, call a few existing franchisees and ask about them. If you find yourself uncomfortable with any of these mandatory contractual provisions, even after discussing them with existing franchisees and the company, you should find a different franchise to pursue.

5. The franchise agreement is full of "can’t-dos." This is the counterpoint to “must-do" rules. The franchise agreement outlines, in detail, a number of things you are forbidden from doing while operating your business.

Many of these “can’t-do” rules are common sense, like non-competes. If the franchisor is going to provide you with all of its trade secrets and operating techniques, then it doesn't want you to operate using its knowledge unless you’re a part of its system.

Many of the remaining “can’t-do” rules are in place to protect the system and all franchisees from any rogue actions from a fellow franchisee. Keep in mind, another franchisee is going to be operating what is basically the same business right down the road from you. That person’s behavior in operating his or her business has a significant impact on your operations and success.

The franchise agreement must also contain sufficient activity restrictions, so that down the road, another franchisee is prohibited from conducting his business in a manner injurious to the value and success of yours, and vice versa. When you think of the “can’t-do” rules from this perspective, they make more sense.

6. The franchise agreement can contain additions or restrictions that don’t seem relevant. These tend to originate from two sources, both of which help to evaluate the company better.

The first source--the franchise company itself. It can insert clauses which address future planning strategies and ideas. The second source--the franchise company’s attorney. Attorneys can insert clauses designed to protect the future rights of a company, like alternate channel distribution of products or services.

These provisions can give you some big clues to a company’s potential future plans, so whenever you see them in an agreement, make sure you ask why they’re being included.

7. The franchise agreement can contain clauses that restrict your ability to sell your business. These requirements will affect whatever exit strategy you may have in place, so review carefully. Often, prospective franchisees consider this the least important consideration, but don’t be fooled. In actuality, most franchise agreements are for an initial term of 10 to 20 years, and most franchisees leave before that term is completed.

The most common of these provisions explains that the person you sell your business to must meet the same requirements as all other franchisees that entered the system at that time. Another provision might require you to offer the franchise company a first right of refusal to purchase your business on the same terms and conditions you reach with a third party buyer. There are also usually some transfer fees you will have to pay the franchisor. You should carefully examine any clauses associated with leaving the system so you’re aware in advance of the rules you’ll have to follow in that event.

8. Always have an attorney review the franchise agreement contract for you. Why have an attorney evaluate it before agreeing to the contract? It’s good practice in the normal course of business, as in life, to have all important contracts reviewed; always consider the cost, advantages and disadvantages when deciding whether to sign.

It’s a fact of life that most people enter into contracts all the time without even reading them, let alone having a lawyer review them. Minor contracts, such as with cell phone companies, will have you commit to a monthly, minimum payment for a few years. Other contracts can be far more substantial-- insurance policies to protect your property and family, or the largest single contract most people enter into-- a home mortgage. Virtually anyone who has a mortgage signed the inch-thick contract without hesitation.

As discussed in the first part of this article, most franchise agreements from strong franchise companies are non-negotiable. If you can negotiate, hire an experienced franchise attorney, and get busy working out the best deal possible. If the franchise agreement isn’t negotiable, then you need to ask yourself if the potential benefit of a review will be greater than the expense. Ultimately, it will come down to whether you really want the franchise, and if you do, then the contract “is what it is.”

9. Virtually all franchise agreements contain a clause that lets the franchise company change the deal-- in material ways, after the fact, without any recourse by the franchisee. This is done by incorporating other documents, as amended from time to time, into their franchise agreement by reference. To make this even more interesting, most such referenced documents are proprietary, meaning you will not receive a current copy nor can you review them prior to signing your franchise agreement contract.

This isn’t as nefarious as it might sound, but you need to be aware of this power. The most commonly-referenced document is a franchise company’s operations manual, which outlines all rules and requirements in detail for operating the business. This manual also outlines the exact specifications required for building and maintaining the business. These specifications can be changed at any time, and if such a change is made in a referenced document, the franchisee is required to conform under the terms of the franchise agreement.

In the real world, this could mean requirements to make more substantial investments into the physical assets of the unit: A new required computer system, remodeling to match a new décor need, or additional equipment in order to provide a new product or service. Be aware of these possibilities, but also consider the final point below before getting too concerned about this clause.

10. One real-world, non-contractual protection: As a collective group, franchisees have a lot of power. You’re in a position where you have to trust the franchise company to do the right thing by you in the future. Unfortunately, you’re not going to get all of the protections you might like in the franchise agreement, and that can make people uneasy.

However, always keep in mind that you do have one very important real world protection--safety against arbitrary or capricious behavior of the franchise company. If they’re out of line, they’re not only hurting you, but hurting all of the franchisees. As a collective group, franchisees have “power of the purse” over the franchisor, since virtually all of a franchise company’s revenue comes from its franchisees.

Most franchise companies recognize this checks-and-balances factor, and the smart ones actively seek franchisee support with important and potentially expensive decisions, such as elected advisory councils, regional meetings and national conventions. As a new franchisee, you may not feel like you have much power, but more experienced franchisees will be protecting their own interests (and by extension, yours), so learn from them and follow their lead when appropriate.

Source: http://www.entrepreneur.com/franchises/buyingafranchisecoachjeffelgin/article201514.html

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