Franchise Agreements and Their Benefits to You
Maybe the poor economy has recently become the reason you lost your job. Instead of taking a negative outlook on the subject, think of it as an opportunity to start a business and make a claim for yourself in the world of franchises. All you need is a small amount of capital, and you can go further with a franchise rather than a home based business.
One of the first things you'll learn about franchising is the importance of the franchise agreement. This is the legal document which governs the franchisee and franchisor relationship. No two are alike and there is no mandated format since most terms, conditions and operations are quite different from franchise to franchise and industry to industry. However, franchise agreements do cover the following basic provisions:
Opening your own business doesn't mean instant success, on the contrary buying a franchise is a huge decision. Once you selected your franchise and signed your Franchise Agreement, the franchisor you will introduce you to their process that includes:
- franchise operations
- ongoing franchise support
- marketing and advertising strategies
- ongoing franchise training
- reviewing financial numbers
Every franchise agreement varies tremendously. The details of the agreement itself are based upon the company and product or service provided, and most contain the following basic elements:
Operation of the Business
The franchise agreement lays out all of the rules, restrictions and obligations of the franchisor and franchisee regarding the successful operation of the business. Whether it is a home based franchise or a standalone business, it is your responsibility to maintain your franchise location in a proper and presentable working condition. As a franchisee, you are obligated to ensure that any regulations regarding trademarks, patents, advertising policies, etc. are followed accordingly.
Geographic Territory
The franchise agreement defines where your specific business can operate along with any exclusivity rights which are applicable. Pay attention if part of your investment involves the purchase of property for the business location. Another stipulation states that, upon the termination of the agreement, the property must be sold to the franchise company, usually under market value.
Franchisor Support
The training and operational support provided by the franchisor throughout the lifetime of the Franchise Agreement (FA). As franchises vary, there may be some additional cost for the franchisee. For example, franchisors have annual conventions where most successful franchisees share best business practices and get together to strategize and prepare for the next year. Some franchisors pay these events and some others expect you to pay for them.
Duration of the Agreement and Its Renewal
Make sure your franchise agreement clearly states the duration of the contract along with renewal options. The initial term tends to last from five to twenty years, but more often the agreements are shorter with multiple renewal periods. Franchisors prefer this policy because any changes made to the franchise agreement during the initial term are automatically put into effect upon renewal. Therefore, the longer the initial duration of the franchise agreement, the better it is for you, the franchisee.
Royalties
Royalties with a franchise are normally ongoing and are usually 4-8% of your monthly sales
Dispute Resolution and Termination of the Agreement
The franchise regulations regarding the policy for resolving disputes between franchisor and franchisee are documented in the Franchise Agreement as well as the standard process of termination of the franchisee, if applicable. Overall, it is important to remember that the franchisor’s goal is for you to be successful. The franchisor provides you with all the necessary tools, training and support that would ensure your success. The more successful you are, the more successful they are.
