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How Turn A Franchise Agreement To Your Advantage
Deciding to buy a Franchise is a huge decision. Once you have
convinced yourself that franchising suits your character and
business aspirations, have identified the right franchise, done
your sums, attended the initial training and perhaps paid an
initial deposit you will be presented with a Franchise Agreement
to sign.
Typically this agreement could run to 40 or 50 pages and can be
a daunting read to those unfamiliar with commercial contracts.
The very nature of a franchise business structure means that the
agreement will be fairly complex. Remember that this document
provides the framework for your business life over the next
seven years or so.
Franchisors, particularly established ones, will rarely change
or negotiate the terms of their standard Franchise Agreement as
they will want to maintain uniformity across all the franchises.
However, it is essential that you understand what you are being
asked to sign. Once you have signed an agreement as a business
person (without the cotton wool treatment given to consumers)
you will struggle to persuade a court later that the terms were
unfair or sufficiently unreasonable to be void. You will be
stuck with it! I strongly recommend that you seek legal advice
from a commercial solicitor familiar with franchising.
Key areas include establishing the true cost of the franchise
including ongoing royalties, advertising costs, minimum stock
purchases. What location and territorial rights have been
granted? Are these exclusive to you? What property and equipment
is required? What obligations are there on you and the
Franchisor relating to the ongoing operation of the franchise?
Often the most complex area relates to renewal and termination
of the franchise. Are you granted an automatic renewal right
beyond the franchise term of 5 or 7 years? What renewal fee is
payable? Can you sell the franchise on? Usually you will need to
give the franchisor first option and/or a right of veto over the
acceptability of any proposed transferee, often coupled with a %
fee. What are the consequences of an early termination by you if
you want or need to get out prematurely? There will usually be a
minimum period with forfeiture of the franchise fee, stock and
possibly other financial penalties and compensation. What if you
are in breach? What circumstances would lead to an automatic
termination? Are you given a period in which to remedy your
breach?
Ask yourself some "What if?" scenarios. What if you died or were
seriously ill? What if you failed to meet your sales targets?
What if you wanted to sell product out of your territory? What
if a customer sued you for faulty products? If you cannot answer
all your What ifs, do seek more advice. Don't be afraid to ask
the Franchisor these questions. But don't expect an impartial
response. The Franchise Agreement will usually have an express
term preventing any reliance upon representations or claims made
by the Franchisor in the initial presentations or documentation.
Much to the disappointment of many clients who come to us for
advice having run an unsuccessful franchise, this applies
particularly to any claims as to how much money can be earnt¡
Buyer beware!
About the author:
Martin Truman is head of commercial law firm, Truelegal
Solicitors. For more information about Franchise Agreements visit The Legal Advice
Centre.
For More Buying and Selling Franchises Information:
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