Entering into a franchise agreement is a significant decision for any entrepreneur. This legal document will govern your relationship with the franchisor and impact your business for years to come. It is essential to approach this agreement with a critical eye and an understanding of the legal implications.
Although it is generally wise to seek legal counsel to better ensure an understanding of the legal impact of the agreement, there are steps you can take to help determine if the agreement is worth pursuing. Any concerns with these three provisions can signal bigger issues with the agreement that will require careful consideration and negotiations before finalizing a franchise agreement.
#1: Initial fees and ongoing costs
Every franchise system has its cost structure. This often includes an initial franchise fee. This upfront fee grants you the rights to operate under the franchisor’s brand. There may also be royalties and advertising fees, recurring expenses that can affect your long-term profitability.
Ensure you have a clear understanding of all fees and how they will impact your financial planning.
#2: Restrictions on goods and services
Franchisors often impose certain restrictions to maintain brand consistency and quality. A common example is a list of approved suppliers. The franchisor may require you to purchase goods exclusively from approved vendors.
There might also be limitations on the services you can offer or how you can expand.
#3: Renewal and termination clauses
The terms of renewal and termination will outline the potential lifespan of your franchise and the conditions under which it can be concluded. Look carefully for provisions on:
- Renewal Rights: Understand the process and conditions for renewing your franchise agreement.
- Termination Conditions: Be aware of the circumstances under which your franchise can be terminated.
These clauses will dictate the stability and continuity of your franchise operations.
Reviewing a franchise agreement thoroughly is essential before making a commitment. Pay close attention to the initial and ongoing costs, restrictions on goods and services, and the renewal and termination clauses. These elements have significant legal impacts and can shape the success of your entrepreneurial venture.
