Franchise Contracts

Franchisors’ relationships with their franchisees are framed by much paperwork. This paperwork includes franchise contracts, the most fundamental of the documents that undergird the franchisor-franchisee relationship. They are legally-binding documents that establish the terms by which the franchise will be operated and detail the franchisor’s and franchisee’s respective obligations.

 

The Contents of Franchise Contracts

 

Franchise contracts often comprise two key parts. The first part of the document is called the Purchase Agreement. The Purchase Agreement describes everything pertaining to the initial franchise transaction. This includes the franchise’s purchase price, and details about the inventory and other business equipment that the franchisee will receive. The nature of the inventory and business equipment will obviously depend on the type of business being franchised. Additional items that are likely to make their way into the Purchase Agreement include marketing support from the franchisor, help selecting the location of the franchise and the training that the franchisee will need to bring him or her up to speed on the operation of the franchise.

In addition to Purchase Agreements, franchise contracts also have Franchise Agreements. The Franchise Agreement is the part of the document that lays out the terms of the franchisor-franchisee relationship once the initial purchase transferring ownership rights has been concluded. It describes the respective obligations of the franchisor and the franchisee. Such obligations might include the regular services that the franchisor will extend to the franchisee or the expectation that the franchisee will maintain a certain standard of cleanliness and carry certain forms of insurance. The Franchise Agreement also describes the rights that the franchisor is extending to the franchisee, including copyrights, trademarks, and trade secrets. An absolutely crucial piece of information that every franchisor will want to include in the Franchise Agreement is money-related information: everything to do with the fees and royalties that the franchisee will pay on a regular basis once the franchise is up and running.

Franchise contracts are put together by franchisors with the help of franchise lawyers. The onus is upon the franchisors to determine the shape that the franchises will take. Thus, the documents often favor them by default. The role of the franchise lawyers is to ensure that the franchise contracts address every relevant aspect of franchising and are legally binding. Potential franchisees can challenge some of the terms presented in the franchise contracts before signing them. In this way, they can ensure that the terms and conditions given in the contracts are more favorable to them.

The franchise contracts that legally define the roles of franchisee and franchisor are not above questioning.

When you sit down to sign franchise contracts with a company that is selling the franchise, be sure you have already reviewed every concept in that document so your expectations line up with what they really will do for you.  Because many of the franchise documents such as the franchise disclosure document are very involved, complicated and large, it is easy to think that buying a franchise is all about franchise contracts. It is also easy to get intimated by the fact that the franchising company has a small squadron of lawyers who put together those scary looking franchise contracts.

Don’t let them hustle you with slick marketing, lawyers in expensive suits and glossy looking franchise contracts and promotional literature. A franchise relationship is all about two businesses negotiating a deal.  Negotiation is a two way street and even though you are “the little guy”, you still have the right to say yes or no to franchise contracts right up to when you click that pen and put your autograph on the dotted line.

The company selling you that franchise has just as much on the line as you do.  Those franchise contracts must line up with the promises both made and implied when they sold you the idea of buying a franchise from them. Those words “sold” and “buying” are important.  The franchising company is selling you a product. You are not a new employee of theirs. You are a customer so you can expect every promise that was used to “sell” you that franchise to show up in slick lawyer language in the franchise contract.

Know what you are obligated for when you sign those franchise agreements.

Next to holding the franchising company accountable for what is in the franchise contracts, be sure you know what you are promising when you take out your pen and sign that franchise agreement.  When that franchise contract is signed, you will be in a legally binding relationship that comes with obligations that are spelled out in detail in the various franchise contract documents.

There are financial obligations that come due the moment the franchise contracts are signed. So you should understand down to the last dime, nickel and penny what you are paying and what that buys you.  You may be responsible to subscribe to the franchising company’s advertising and to pay a share of other costs of running your franchise.

So before you stand up from the table after signing those franchise contracts, get a firm understanding of who pays for what, when and how much. If you need to get your own swat team of high priced lawyers and accountants in on the act, do it.  Far better to go overboard before signing those franchise contracts than to regret it after when nothing can be done to change those contracts in your favor.

Franchise contracts represent a big investment for franchisee and franchisor alike.

You are not being a party pooper if you ask some tough questions before you sign any franchise contracts. Don’t let anyone accuse you of not having the enthusiasm and optimism to make a great franchising operation work just because you are smart enough to read the fine print before you sign your life away. You can have enthusiasm and excitement coming out of your ears and still be a smart business person at the same time.

Let’s not kid ourselves here. Franchising a small business is a big deal. It is a big deal for the franchisee and you can be sure that before they are willing to sign any franchising contracts with you, they checked you out soup to nuts. So you be just as fussy and make sure the franchisor who wants you to own a chunk of their success really will live up to those franchise contracts and is not blowing smoke up your pants.

When a franchisor sets out to “sell” a franchise in their business, it is a big profit making operation for them. The franchisor is setting up a sweet deal for themselves where you do all the hard work day in and day out and they show up once a month and take away the bags of money that come to them from those fat franchise royalty fees.

It is the franchise contracts that make this sweet deal work for them. This is not to say that those same franchise agreements will not pay off big time for you. Franchising is a great way to jump start your small business because in exchange for the investment you make, you open a business that has a built in name recognition and a customer base who want to spend money with your small business.  That can be a guaranteed success if you work hard and know what you are doing.

Franchise contracts are not set in stone.

If you are a little intimidated by those fat franchise contracts that just showed up on your desk, those butterflies in your stomach are your friends. They are telling you not to just turn to the last page and start signing where the franchisee put the big red X marks.  Every paragraph, line and comma of that fat document will have a big impact on your daily life once you are in bed, so to speak, with that franchising company.  Make sure that you agree with every paragraph, line and comma before you so much as take the cap off of your pen to sign up for the deal.

You are not in this alone. Investing in the services of a good franchise lawyer and a franchise consultant is a savvy move on your part.  Be sure that someone takes that franchise contract apart piece by piece and knows exactly what it says.  Then make sure those high priced franchise gurus explain every concept on the pages of that franchise contract to you in language you understand.

You deserve to know what those franchise contracts say and you deserve to have it written in language you understand.  If the franchise contract is written in a bunch of legal mumbo-jumbo, send it back and ask for it to be returned without the dog and pony show.

Nothing is set in stone. If you don’t like something in that franchise contract, change it. Your high priced franchise gurus know how to make those changes.  Don’t let the franchisor push you around. If you negotiate so those franchise contracts lay out just like you want them to, you will walk away with a sweet deal for yourself and a sweet career ahead running a very profitable franchise small business to call your own.