Don’t Fear the Franchise Agreement (but Read it Carefully)
If you are about to begin your adventure as as a new franchisee, you may experience some anxiety about signing the franchise agreement. You may wonder: what’s negotiable and what’s not? How can you be certain you’re getting a fair deal?
Every franchisor has a standard franchise agreement. It sets forth the franchisor’s expectations of its franchisees. The stronger the company, the longer the agreement and the less room there may be for negotiation. This is only fair, and produces a level playing field. Why should a better negotiator get a better “deal” on their franchise than someone else?
A franchise company may avoid making agreement terms negotiable to some franchisees but not others for several reasons. The law requires franchisors to disclose any special deals or terms they have negotiated. And franchisors may find it cumbersome to administer many different versions of a franchise agreement.
The purpose of the franchise agreement
If you’ve chosen to join a strong, successful franchise, there should be nothing to fear in the franchise agreement. Consider its purpose:
- Describes the costs associated with owning the franchise
- Specifies requirements related to physical property, such as the location, building, equipment, and supplies
- Defines operating practices that protect the entire franchise system
- Identifies your protected territory
An example: the “Mighty Cold Ice Cream” company
Suppose you’ve purchased a Mighty Cold Ice Cream franchise. The franchise agreement requires you to buy the equipment and ice cream ingredients from the franchisor, at a discounted price. This protects your business because the discount is memorialized in the contract. It also protects the brand, because it prevents other franchisees from selling different or inferior products under the Mighty Cold name.
Brand consistency is a major benefit of franchising. It ensures that the quality of the product will be standard at each franchise location. Susan in Sacramento uses the same recipe and ingredients as in Bernie in Boston. Serving sizes are the same. Pricing and advertising is similar. And a Mighty Cold fan knows that wherever he travels, he can enjoy the same Mighty Cold experience at any location.
In addition to protecting the quality and standards of the brand, a good franchise agreement will define the rules of the relationship. The Mighty Cold agreement may prevent Susan from selling her Aunt Lena’s crumb cake in her ice cream parlor. It may prohibit Bernie from providing advertising space on his parlor walls for the local micro brewery. These rules maximize each franchisee’s opportunity for success, and protect the brand name of the franchise.
In the same manner, the franchise agreement’s description of your protected territory guarantees that your Mighty Cold parlor won’t be competing with another Mighty Cold on the next street. But take note that the size of your territory is one item that can occasionally be negotiated in a contract. So if that is a concern for you, be sure to ask.
Additional elements of the franchise agreement
A franchise agreement will also cover:
- What the initial franchise fee includes/covers
- Whether the franchise fee covers the initial inventory of products and supplies
- Whether the franchisor will continue to provide inventory
- The degree of control the franchisor will exert over franchise identity and product quality
- Whether the franchisor will provide continued training and assistance
- Whether advertising will be local or national and whether its cost will be shared
- How royalties are calculated and paid
- Bookkeeping, accounting, and reporting requirements
Regardless of the degree to which the franchise agreement is nonnegotiable, be sure to review each and every provision carefully. Make sure you understand why each item has been included and how it will affect you. A good franchisor will take the time to help you become comfortable with the contract.
Finally, the complexity of a franchise agreement shouldn’t steal your excitement about becoming a business owner. This is a thrilling time and a good franchise agreement is just your assurance of getting a fair and equal chance at success. By protecting the franchise brand name and good will, the franchise agreement protects you as well.