On of the biggest steps in buying a franchise business is to review documents provided by franchisor including the Franchise Disclosure Document (FDD). Those documents usually are composed of several hundred pages and reading them all can seem a very daunting task. However, the contract governs the legal relationship between the franchisee and the franchisor and includes important provisions for future actions if the relationship doesn’t work out. So, it is very important to read and understand the documents before you sign the contract and become a franchisee.
But, when you start reviewing a franchise FDD and negotiating the contract with the franchisor, you might find things that are very frustrating and that might give you cold feet in starting a franchise business. Here are five different concerns that every person like you might have while dealing with negotiating and signing a franchise agreement.
1- The agreement documents are drafted very one-sided!
You are right! Almost all of the franchise agreements are written in the same language. When you read the documents, even if you don’t have any legal background, you understand that the whole documents is prepared in a way that protects the franchisor and some times you see no room for words such as fairness and impartiality in there. When you add negotiation risks to this, it becomes a perfect combination of disappointment and anger!
What you need to notice is that one of the main goals of the franchise agreement is to protect the franchise system as a whole.The franchisor need to protect the brand, integrity of the operating system and franchisees’ businesses in the aggregate too. The franchise company believes it knows how to accomplish this task best, and that is how the contract is written. If you’re not comfortable with that approach, find a different franchise company with a different contract you are more comfortable with.
2- The agreement is packed with must, should and have to!
Yes! You are right. Upon reading the documents you realize that there are a lot of rules and obligations for the franchisee to follow. There are clauses that outline your obligations in starting and operating the business. However, those rules and obligations is part of a system that believes can help you have a successful business. Being aware of and understanding those rules clearly you will be in a better position in knowing about different aspect of running your business.
You can almost always can call a few existing franchisees and ask about how those rules and obligations affects their business. If you find yourself uncomfortable with any of these mandatory contractual provisions, even after discussing them with existing franchisees and the franchisor, don’t get stuck find a different franchise to pursue.
3- The franchise agreement contains irrelevant restrictions!
The franchise company might include clauses in the franchise agreement that reflects their future plans, ideas or growth strategy and might ask you to contribute to the associated costs when incurred. The franchise attorneys might also add clauses to the agreement to protect their client (franchisor) in any unpredictable or predictable future situation. Always ask the franchisor to clarify those clauses for you before signing the contract.
4- Do I have the right to sell the business?
The franchise agreement can contain clauses that restrict your ability to sell your business. These requirements will affect whatever exit strategy you may have in place, so review carefully. Often, prospective franchisees consider this the least important consideration, but don’t be fooled. In actuality, most franchise agreements are for an initial term of 10 to 20 years, and most franchisees leave before that term is completed.
The most common of these provisions explains that the person you sell your business to must meet the same requirements as all other franchisees that entered the system at that time. Another provision might require you to offer the franchise company a first right of refusal to purchase your business on the same terms and conditions you reach with a third party buyer. There are also usually some transfer fees you will have to pay the franchisor. You should carefully examine any clauses associated with leaving the system so you’re aware in advance of the rules you’ll have to follow in that event.
5- After All! Is he franchise agreement negotiable?
Both yes and no!
Agreements with well-established franchise companies are typically non-negotiable. If you are looking into buying a proven, successful system, where current franchisees are happy with their decision to go into the franchise, there might be no room for negotiation. Don’t be surprised if you’re told the franchise agreement “is what it is,” and that you have to sign the same contract as every other franchisee if you want to become one yourself. However, if there are provisions of the franchise agreement that prompt questions or concerns, ask the franchise company to provide you with a letter of clarification, addressing the specific point or points you have an issue with. This technique allows a level of comfort to be created, even with a non-negotiable contract.
You might be able to negotiate with some franchise companies. Test them by asking question about possibility of changing the contract in case you find something that really needs changing. If they were positive, it is time for you to use assistance of an expert to review the franchise agreement and to negotiate accordingly. Any change to the original Agreement can be made into an addendum. While you are clarifying different issues with the franchisor, take notes and ask them to put the important ones in the addendum to the main agreement. Be careful about order of priority of the documents and ask them to set the addendum priority higher than other documents in the franchise agreement.
