Franchise agreement cheat sheet
So, you’re buying a franchise and have just received the franchise agreement from the franchisor. You may be overwhelmed by the volume of the agreement alone (not to mention all the other documents).
If you’re a savvy franchise buyer, you’re probably getting professional advice on the documents – but here’s a quick cheat sheet on what to look out for yourself:
One of the first few clauses in the franchise agreement will set out whether you’re being granted an exclusive territory or not.
If so, check how the territory is defined (eg is there a map attached?) and whether there are any circumstances in which the territory can be reduced by the franchisor.
2. Franchise term
Next, you should check what the term of the franchise is and whether you have any options to renew.
In checking this, you should also make sure that, if you’ll be running the business from a fixed site, the lease matches the term of the franchise (or at least contains a further option to renew).
3. Franchise fees
You can then jump straight to the most important part – the fees.
The fees you’ll need to pay to the franchisor are typically set out in a schedule to the franchise agreement at the back, and can include the initial franchise fee, training fee and ongoing royalties.
4, Setting up the business
The franchise agreement will usually contain a clear outline of both parties’ obligations in getting your franchise business set up. This will include clauses relating to fit-out of the premises, completing training and buying equipment and products.
5. Performance criteria
Does the franchise agreement set out any minimum performance criteria? If so, you should feel comfortable that these are achievable and discuss any concerns you have with the franchisor.
You should also check what happens if you fail to meet the minimum performance criteria. Sometimes, franchise agreements will allow for the agreement to be terminated where these are not met.
6. Selling your business
Most franchisees buy a franchise with a strategy in place to recoup their investment. Make sure you check the transfer provisions, which will set out how you can sell the business and the terms that will apply to the transfer.
Obviously to be avoided, you should also check the breach and termination provisions of the franchise agreement.
Under the Franchising Code of Conduct, a franchise agreement can only be terminated in certain circumstances. You should check that these provisions match the Code and don’t allow for termination in any other circumstances.
After expiry or termination of the franchise agreement (including selling the business), there will usually be a number of restraints imposed on you which prevent you from conducting a similar or competing business.
These restraints should be reasonable, and you should consider your long-term plans when deciding whether or not to go ahead with the franchise. Ultimately, restraints should be given very careful consideration and appropriate carve-outs negotiated if necessary.
Franchise agreements will often contain personal guarantees from you in your individual capacity. Whilst common, you should be aware that these naturally involve some risk to your personal assets and you should seek professional advice about their impact.
Of course, when buying a franchise, you don’t want to think about things going wrong. However, you need to know what avenues are available to you if you have a dispute with the franchisor.
The Code sets out a dispute resolution procedure, so you should check that the franchise agreement complies with the Code in this respect and that a procedure is clearly set out.
Reading the franchise agreement yourself first will make sure you understand the “big ticket” items before you seek professional advice on the finer details. Having this understanding, coupled with separate legal advice, will ensure you are a well-informed franchisee before you make such a big purchasing decision.