The Franchise Contract: All You Need to Know (Part 1)

franchise contract

So you’re thinking about franchise ownership–an exciting prospect. Before you sign on the dotted line, let’s take a look at the franchise contract. This important document governs the legal relationship between the franchisee and the company. This includes setting forth what will happen if for some reason the relationship doesn’t work out.

One way to think about the franchise contract is that it’s like a pre-nuptial agreement. Perhaps it’s not very romantic, but you need to give it careful consideration before you sign. Here are five important aspects to understand before you execute the franchise contract:

Typically Non-Negotiable

Strong franchise companies (i.e., those that are proven and successful, with satisfied, prospering franchisees) typically have a non-negotiable franchise contract. They have learned that standardizing all aspects of operations and the franchisor/franchisee relationship maximizes the benefit to the company and franchisees. This standardization begins with a uniform franchise contract. So don’t be surprised if the franchisor tells you the wording of the franchise agreement is unchangeable. Your choice will be to sign or not to sign.

If portions of the agreement are unclear or concern you, you can ask the franchisor for a letter clarifying the points you have issues with. This can give you a level of comfort and understanding that a non-negotiable contract may not otherwise provide.

If Negotiable, Be Careful

Take heed if a franchisor is willing to negotiate substantive provisions of the franchise agreement. That may be a red flag. Although this seems counterintuitive to most prospective franchisees, keep in mind that strong franchise systems typically standardize everything. When a contract is open to negotiation, you may question the company’s level of certainty about the success of its brand and operating system. And if you’re questioning the brand and operating system, then it’s likely not a good idea to go forward with signing on.

As part of your due diligence, always ask the franchise company whether the terms of their franchise agreement are open to negotiation. Most will initially say no. It’s a good idea to test this by asking a follow-up question. For example, you could ask, “So if there are just a few words I’d like to change, you wouldn’t even consider it?” If they waffle and respond that they’d consider changing a few words, they are really saying the contract is negotiable. In that case, it’s a good idea to seek expert guidance and negotiate accordingly.

Usually Unilateral

A franchise contract is typically unilateral in nature, written completely from the company’s perspective. This may not seem fair or reasonable, especially when the contract is non-negotiable, but it’s almost always the case. And it’s understandable when you think about it further.

Remember, a strong franchise company seeks to protect the system as a whole. This includes the brand, the integrity of the operating system, and the way each franchisee runs their business. The franchise company has determined the way the business must operate for it to be successful and they’ve written those specifications into the contract. If you’re uncomfortable with that approach, you may want to look for a franchise company with a contract that puts you more at ease.

Full of “Must Do” Rules …

You will notice during your very first reading that the franchise contract contains a lot of rules. It usually outlines very clearly a number of things you must do on a regular basis when operating the business. These specific rules are the most important things you’ll need to do to make your business successful. The franchisor spells them out in the contract so their importance is clear and understood.

You may want to do a quick check on the necessity of any “must do” rules in the contract you have questions about. You can reach out to a few franchisees and ask them for their thoughts. If you are uncomfortable with any of these mandatory contractual provisions even after discussing them with franchisees and/or the company, you should probably find a different franchise to pursue.

… and “Can’t Do” Rules

The franchise contract will also include numerous “can’t do” provisions. It will specify in detail things that you are forbidden from doing when operating your business. Many of these rules will be expected and understandable, like non-compete clauses. When a franchisor provides you with all their trade secrets and operating techniques, they’ll expect you to be part of their system if you’re running the same (or a similar) business.

Many other “can’t do” rules are designed to protect the system (and all of the franchisees) from any rogue actions by other franchisees. Remember, other franchisees will be running (as it appears to the public) the exact same business right down the road or around the corner from yours. The way those other franchisees operate their businesses can affect the value of the brand and your business. When you think of the “can’t do” rules from this perspective, they likely make much more sense.

 

These important considerations should give you a foundation for understanding the franchise contract and how it can impact your life as a franchisee. In Part Two, coming next week, we will explore more subtle considerations that equally important to your understanding of the franchise contract.