What to look out for in a franchise agreement

The franchise route can be a safe start to your entrepreneurial journey or the expansion of your business interests. With an established and proven track record, add commitment and hard work and you could be on your way to entrepreneurial success. Indeed, it has been argued that buying into a franchise is likely to yield the results one would expect compared to starting out completely on your own (1).

While the picture appears rosy, like in many relationships, there will be challenges from time to time, be they opportunities or problems. When they surface, there needs to be a mechanism to address them in a manner of mutual benefit to all parties. In this regard, a franchise agreement plays a vital role.

What is a franchise agreement?

Essentially, it is a written document that spells out the terms and conditions of the business relationship, or franchise arrangement entered between the franchisor (the business/person issuing the franchise licence) and the franchisee (the business/person buying the franchise licence).

A typical franchise agreement has 4 parts to it:

1. Terms governing the operations of the business

2. Franchisors' roles and responsibilities as well as obligations

3. Franchisees' roles and responsibilities as well as obligations

4. Steps and procedures applicable to the prospective franchisee prior to issuance of the franchise licence

In addition, there are two important facts to note:

1. A franchise agreement is not a business sales agreement

2. Franchise agreements will differ from business to  business

Apart from the franchise agreement, there are laws and rules governing the conduct of franchised businesses as well as a Franchising Code of Conduct. Some of the details in them may be written into or referred to in the franchise agreement.

Franchise agreement and what you should look for in one.

1. The right to use the franchisor’s brand

This is imperative. It needs to be explicit in the franchising agreement that the use of the franchisor’s brand is permissible. The strength of the small business owners is embedded in the brand name.

2. Details pertaining to operating under the franchise brand

As prospective franchisees, it’s important you are aware of the franchising code, franchise agreement grants, and terms and conditions governing the use of the brand. Inappropriate or not permissible use of the brand may result in a breach of the franchise agreement.

3. Territories

Every franchisee is typically given an exclusive territory in which it can operate to avoid intra-franchisee competition. You may be granted more than one territory depending on the competing business. Whatever the number is, it’s important they are spelt out in the franchise agreement.

4. Initial franchise fee and costs associated with the purchase of the franchise

This is an area of the franchise agreement that must be sorted out early in the relationship. The figures vary across different types of businesses as well as operating models.

5. Advertising and branding obligations

This is often referred to as the marketing fee or ongoing fees. In a franchised business model, the cost of advertising and branding may be split into local and state or nationwide marketing fees. For the latter, there’s usually a common fund you’ll need to contribute towards. With the former, the franchisor may stipulate a sum relevant to your territory.

6. Intellectual property

From the brand name and logo to the actual product or service, the franchisor would have invested time and money into developing them and ensuring they work. It is their intellectual property. You will need to be aware of them to ensure you're using them correctly.

7. Terms and conditions pertaining to the renewal of the franchisee

The franchise agreement will spell out the terms and conditions pertaining to renewal as it is never for life. Again, they may vary across franchise agreements.

8. Services provided by the franchisor

A franchise agreement isn’t a hi-and-bye document. You should expect the franchisor to render services to help you get started and operate the business over a period of time. The franchise agreement will detail these services.

9. Training

You or your staff will need to be equipped with the relevant skills and knowledge to give the business a chance to succeed. The franchise agreement should detail the type of training to be provided, the length of time it will be provided and the frequency of training or retraining. It will also detail the party responsible for the training of new staff.

10. Quality control

The quality of products and services impacts directly the success of the business. You will need to know how quality control will be measured by the franchisor as it impacts the day-to-day conduct of the business.

11. Transfer of franchise business

You might choose to transfer your interest in the franchise to another party. This is allowed. However, there will be rules in the business system, or franchise agreement governing it.

12. Expiration of franchise agreements

As a franchise business, there are obligations you will have to fulfil upon the expiration of the franchise system. For example, you may not be allowed to work in the trade for a period of time, either as an independent or competitor franchise.

13. Legal relationship between franchisor and franchisee

Like in any business franchise relationship, its conduct must be governed by rules and regulations. Both parties’ roles and responsibilities, as well as obligations, are detailed in this section.