If you’ve settled on a franchise and the franchisor is happy to sell you the rights to the system, the terms of your commercial relationship must be set out in a franchise agreement.
What is a franchise agreement?
A franchise agreement is a contract stipulating that a franchisor is granting someone the right to sell goods or services under a specific system and brand – thereby becoming a
The franchisee must pay an agreed sum to the franchisor in order to acquire those rights.
Agreements vary substantially depending on the sector and franchise system. But in general they are long and detailed – running to dozens of pages – and contain lots of rules – both things you must do and mustn’t do.
If this seems too restrictive you may reconsider if franchising is really right for you.
If you’re particularly concerned about certain terms you could ask existing franchisees in the network if they’ve had any problems related to those terms.
Don’t sign the agreement unless you trust the franchisor and have
Be aware that a franchising agreement does not give you a ‘business for life’. It only gives you the right to operate that business for the term specified by the agreement.
There is no guarantee that the agreement will be renewed at the end of the term unless specifically negotiated. But if you’ve performed well, then in all likelihood the franchisor will be happy for you to continue.
What to expect from the franchisor
Australia’s Franchising Code of Conduct stipulates that franchisors must give you a short information sheet outlining the risks and rewards of franchising when you express an interest in, or formally apply for, a franchise.
If both parties agree to proceed with the franchise purchase/sale, the franchisor must then give you three documents:
- A copy of the Franchising Code
- A disclosure document
- A copy of the final franchise agreement
These documents must be given to you at least 14 days before you sign the agreement or pay a non-refundable deposit.
What will you find in a franchise agreement?
A franchise agreement typically includes:
- The duration of the franchise agreement – usually a fixed term of 3-5 years – and renewal rights
- Fees, including initial purchase fees, renewal fees, royalties, advertising and training fees and so on
- Opening date and territory limitations (to prevent
youencroaching onto other franchisees’ territories)
- Operating procedures and quality control – procedures and standards you must abide by
- Training – any seminars, meetings, online courses and so on that you’ll be obliged to attend
- Intellectual property rights and obligations
- Brand image – including logos, uniforms and the appearance of any premises
- Insurance obligations
- Occupational health and safety obligations
- If the business needs premises then the retail lease – which could be in your name or the franchisor's name. Check also if the term equals that of the franchise agreement
- Supplies – some franchisors manage their entire supply chain and require you to obtain supplies and equipment from the company itself. Familiarise yourself with procurement terms and conditions
- Violations that result in disciplinary/remedial action or termination of the agreement
- Indemnification – where the franchisee must reimburse the franchisor for any losses suffered through the franchisee’s negligence or wrongdoing
- Dispute resolution methods used by the franchisor
- A non-competition covenant proscribes you from opening a similar business in the same locality – both during and for a period after the agreement term
- Prerequisites for either party to terminate the agreement and whether the franchisor has first right of refusal to buy the franchise
Walking away – even after signing the agreement
Be prepared to walk away if you’re unhappy about certain terms. You certainly can’t expect to renegotiate parts of the contract that you don’t like – the franchisor has a proven business model and won’t change it to suit one
In fact, if they are prepared to make adjustments this should arguably set alarm bells ringing about the franchisor’s credibility.
You are entitled to terminate a new franchise agreement – as opposed to a renewal, extension or transfer – within seven days of commencing or submitting a payment under, the agreement (whichever happens first). The franchisor must refund any payments made – minus reasonable expenses if specified by the agreement – within 14 days.
This is the final article in a four-part series outlining the steps to buying a franchise – others include:
- Is Franchising Right for You?
- How to Choose the Right Franchise
- How to Sell Yourself to a Franchisor
Still not sure which franchise you want to buy? Browse our franchises for sale now.