Necessary Evils - Working With Franchise Agreements

Understanding a franchise agreement is instrumental when building a business relationship between a franchiser and a franchisee. It outlines as simply yet detailed as possible what roles both parts play in this relationship. This agreement is meant to make sure that this particular franchise will be run the same way as all of the businesses that are under this franchise.

A franchise agreement bests benefits the franchiser. This is due to the fact that they have a particular model that

provides a perfectly outlined process of how the business is run. These are typically tried and true practices when it comes to larger businesses and the franchisee must do it to the letter. There are a few key points to consider when it comes to franchise agreements.

The first point to consider is the adherence to what the franchise operations manual lays out for the franchisee. The operations manual is considered to be the bible of that particular franchise. It is a handbook that provides all of the necessary guidelines and steps to take in whatever situation may arise when it comes to the business. This "bible of the business" is copyrighted to the franchiser and if anyone makes the contents of the book public they could have legal actions taken against them. As the manual is amended, franchisees need to follow all additions to it. There can be penalties when they do not follow these amendments.

There is an explanation of how exactly that particular contract will work out. This portion of the contract covers each and every aspect of the agreement. It explains the relationship that is expected between the franchiser and the franchisee. It is important to remember that this is a commitment and if signing into this kind of relationship--every aspect of the contract needs to be understood in layman's terms. It is crucial to understand and if it is necessary it is best to have a lawyer to look over the contract for you. The lawyer will be able to aid in research and questions to make sure that you are also safe in your investment.

The next section will have the "remarks of the proprietor". This section explains the use and misuse of theimportant things such as the name of the franchise, the guidelines to training, advising information, and even the support systems that are in place for the franchisee. This section also covers what strategies in regards to marketing and advertising are mandatory to use.

The fourth section will cover clearly which materials will be used in regards to advertising. It will cover whatmediums are to be used for promotion and how much money will more than likely be invested into promotion and advertising regionally. This should described so that the franchisee will know what they are signing on for.

The fifth section is repair, upkeep, and maintenance. This is a detailed overview of the repairs and upgrades that the franchisee will need to to make after specified spans of time or when they are needed. In this agreement it is typically specified what needs to be updated and when. It covers every aspect of design and utilities such as interior and exterior decor and furniture.

There are other specifics that are covered such as insurance, terms of agreements, accounting, and specific clauses dependent upon the franchiser. These all need to be considered and looked over until there is a complete understanding.

Things That Should Be Considered In a Franchise Agreement Contract

A franchise agreement contract is the most sophisticated document whenever it comes to franchise opening and franchise handling methodologies. This one piece of paper holds the license of you operating with the business in various areas or parts of the selected region. This is the reason that these should be clearly read and reviewed before actually signing it and starting the business. This approach has worked efficiently for most of the franchise holders. But as said earlier, these are very sophisticated documents and that is why there are several things that need to be considered when it comes to the franchise agreement contract.

First of all the territory of the business must be defined and checked in order to be sure that you are not entering into some other franchise's territory. This approach is simply against the rules and laws of the contract. Secondly the total investment that includes all the costs in opening up a franchise must be mentioned and checked carefully. The next thing that needs to be monitored in a franchise agreement contract is the services and products that will be offered in that specific region by a specific franchise. This will make the goals clear.

There are many other factors such as the site selection, promotions and advertising activities the franchise will start in order to make the awareness of the product or service that is being offered. Renewal terms are also mentioned in these contracts so it also contains information on how should you run your franchise and what has to be achieved in order to get the renewal contract. It also has the information about the selling and the rights that are transferable.

So a franchise agreement contract is the document that will tell you that how you can get the best out of the franchise and what has to be achieved in order to become the partner with the company once again.

The Perilous Franchise Agreement: What Did You Sign?

Purchasing a franchise has become one of the most popular avenues for individuals looking to escape the rigid work day of a 9 to 5 job and take the leap into the world of independent business owner. After all, who doesn't dream of being their own boss and controlling the limits of their own financial future? For anyone looking to act on their entrepreneurial spirit, franchising can indeed offer many attractive qualities that can provide excellent growth and earning potential, as well as satisfy that longing for independence. On the other hand, individuals that jump into franchising too quickly without adequate planning can find themselves mired in financial and legal problems. Even the most sophisticated businessperson can fall into this trap and be left scrambling to understand exactly what they signed.

Purchasing a franchise requires not only a substantial investment of time and money, but requires careful planning and investigation. You should thoroughly review all disclosure documents provided to you and take the time to interview both current and former franchisees of the franchise system. These simple but important steps will often spur many new questions for you to ask the franchisor and assist you in making an educated decision about which franchise is right for you. In particular, you should inquire about the types and amounts of initial and ongoing training, marketing and advertising support the franchisor provides. Indeed, your monthly royalty payments should go to more than just the licensing rights of the franchisor's name. Those hefty payments should also be subsidizing the franchisor's ongoing support and assistance, as well as brand improvement to help you develop and maintain a prosperous business.

Part of your careful planning and investigation should also include a detailed review of any document the franchisor asks you to sign. Every franchise document has been prepared by an experienced team of lawyers and you should consider arming yourself with the same professional advice and counsel before you sign on the dotted line. You should take the time to review and understand each term in your franchise agreement. Even the most seemingly benign words such as "sole" or "reasonable" in terms of the franchisor's discretion can mean the difference between salvaging your business and forfeiting your entire investment.

In taking steps to better understand what you are signing, you will be better prepared to negotiate with your franchisor to include more favorable terms in your franchise agreement, or, in some instances, avoid signing an extremely oppressive agreement altogether. While it is typical that your franchisor will negotiate some terms of the proposed franchise agreement, it is highly likely that it will hold fast to many terms as written. Pay particularly close attention to clauses or phrases that appear one-sided. In other words, if the franchisor is permitted to do something make sure you too are afforded the same contractual rights. Other important clauses and terms may include any or all of the following.

Restrictive Covenants

Beware of restrictive covenants that may prevent you from carrying on your livelihood both during your franchise term and for a period of years after your franchise expires or otherwise terminates. These terms are typically referred to as covenants not to compete. These clauses can cut both ways, and often do. For instance, if a franchisee is located next to you and he/she agreed to a restrictive covenant, they would not be able to operate for a certain time period or within a certain radius of their store or other franchised stores after termination or expiration of their franchise. On the other hand, should you be terminated or not renew your franchise agreement, you also could be prohibited from operating a similar business for a period of time in a specified area.

Exclusive Territories

It is extremely important that you be afforded an exclusive territory in which to operate your franchise. If you do not include this in your agreement your bottom line may suffer substantially from encroaching franchisees, corporate competitors, or both. Also, if your business entails sales, make sure you franchisor is not permitted to unreasonably compete with you through internet sales. Internet competition may serve to be just as devastating to your business as if another store opened next door.

Cross-Default Provisions

Oftentimes franchisors will include cross-default provisions in your franchise agreement. This means that a default under one agreement can be construed as a default under all agreements that you have with the franchisor. This is particularly troubling if you own multiple franchised units which would permit your franchisor to terminate not one, but all of your stores, regardless of how profitable one may be over the other.

Lease Takeover Clauses

Franchisors often require that in the event your franchise agreement is terminated, that it be entitled to come in and operate your store and take over your lease. This is extremely important for franchisees who may wish to exit the system and operate a completely separate business out of the leased space. By agreeing to this term, you may effectively give up any rights you have to a prime location.

Renewal Rights

You should be afforded the opportunity to renew your agreement or have the right to sell it for value. You do not want to learn after ten or more years of hard work that you simply have "rented" a business and have no way to profit from the development of your good will and your substantial investment of time, money and effort.

Dispute Resolution/Venue Selection

While no one wants to plan for or even think of ending up in litigation with their franchisor, a smart businessperson will always plan for the worst case scenario. Beware of clauses that require you to litigate in a specific forum. If you are located in Virginia and your franchise agreement requires that all disputes be decided through arbitration in Arizona, keep in mind that costs in having to defend or bring claims against your franchisor will be significantly increased. In addition, try to avoid waiving your right to a jury - in most instances, juries will be much more receptive to a franchisee's plight than a law-bound judge.

By informing yourself upfront about the potential dangers that may lie ahead, you will be better equipped to deal with the challenges faced by many into today's ever-growing and ever-changing world of franchises. In the long run, a small investment of time and money up front to understand exactly what you are signing will better prepare you for the future of your franchise. Most importantly, it will likely better equip you to maintain an extensive and prosperous relationship with your franchisor for years to come.

Importance of a Quality Franchise Agreement

Franchising is a relatively modern distribution channel that permits foreign brand owners to exercise a substantial degree of control over the manner and mode in which their products or services are offered and sold to consumers. It ensures efficient and rapid trans-border market penetration to the Franchiser, an opportunity to take its brand beyond boundaries with minimum capital investment and risks.

Simply put, a franchise is a business model premised on a license granted by one entity (the 'Franchiser') to another (the 'franchisee') permitting use/exploitation of the Franchiser's intangible assets such as brand/trade name, business model and concept, image, marketing techniques and other intellectual property for the purpose of making sales or providing services in a defined geographic location in return for a sum of money.

Importance of a Quality Franchise Agreement

'Quality' in any agreement, regardless of its subject matter, is, inter alia, seminal for mitigation or avoidance of disputes between contracting parties. 'Quality' of an agreement may be assessed on numerous parameters including: clarity in purpose, holistic/loophole free character; unambiguous provisions/terms/conditions with no scope for contradiction; manner of presentation; and most important enforceability.

A 'franchise agreement' is a contract between the Franchiser and the franchisee which defines their relationship and inter se rights and obligations.

'Quality' assumes even more significance in a franchise arrangement due to the inherent commercial and operational complexities present in such arrangements. A quality franchise agreement must effectuate the underlying symbiotic relationship between the Franchiser and the franchisee.

A quality franchise agreement must ensure clear, unambiguous and water tight coverage of all critical issues, such as, roles and obligations of the parties, confidentiality and intellectual property protection; payment terms and taxes; duration, renewal and termination; agency issues; post termination issues; negative covenants; governing law and jurisdiction (especially in international franchise arrangements).

Naturally, the importance of a quality franchise agreement for a Franchiser and a franchisee differs considerably as discussed below.

The Franchiser's Perspective:

The importance of a quality franchise agreement for a Franchiser cannot be stressed enough. Of paramount importance for the Franchiser is protection of its brand, image, reputation, know-how, business concept and other intellectual property rights as well as limiting exposure to potential risks and liabilities resulting from the franchisee's conduct.

It is important that the franchise agreement is carefully drafted to ensure clarity on duties and services of the franchisee including in the areas of investment and infrastructure, adherence to specific operating guidelines to maintain uniformity, reporting requirements, quality maintenance; annual market penetration targets; financial returns such as royalty and fee payment, etc.

A quality franchise agreement should provide adequate fetters and security against misuse of the Franchiser's intellectual property rights by the franchisee. Further, it must provide enough quality control mechanisms to the Franchiser, including control over managerial discretion of the franchisee, to enable it to control its business concept and protect its brand and reputation. Consequently, the franchise agreement must unambiguously and comprehensively address vital issues, such as, the temporal and territorial scope of the license, the rights and property licensed, nature of the license, restriction on use of licensed rights and property, quality control measures, including periodic audits to ensure that the business concept is adhered to, sourcing of products, training, type of products to be sold under the franchise, etc. The business concept being licensed and mode and manner of operation must be clearly stipulated to enable the franchisee to conform to it. However, the downside of excessive control over a franchisee and franchised products is that the Franchiser may become susceptible to liability for acts of the franchisee in claims by third parties. A quality franchise agreement should ensure that the relationship is on principal to principal basis and the Franchiser is not liable for the franchisee's acts and omissions.

Another crucial issue for the Franchiser is protection from competition by its franchisee. It is common practice to include non-compete covenants during and post termination in most franchise agreements. However, a quality franchise agreement, like any other agreement, must have a carefully crafted non-compete clause to ensure that it is enforceable under law and not a redundant term. Unreasonable post termination non-compete clauses which are against public policy and in restraint of trade would be enforceable.

A quality franchise agreement should ensure that the franchisee conforms to the business concept. It must have stringent provisions to deal with situations of breach and non-adherence to the business format and misuse of brand by the franchisee. Also, the franchise agreement must protect the revenue flow from the franchisee to the Franchiser.

Issues related to governing law and jurisdiction, post termination obligations to ensure protection against breach of confidentiality and intellectual property, inventory handling are equally critical and need to be adequately addressed in a franchise agreement to ensure effective control and systematic business expansion.

The Franchisee's Perspective:

'Quality' is as serious an issue for the franchisee as it is for the Franchiser. As the initial investment in the venture is that of the franchisee, a quality franchise agreement is essential for a franchisee to capitalize on its investment.

For a franchisee, a quality franchise agreement must have clearly defined payment terms with no hidden fees or costs and a clearly defined area of operation. It must protect the franchisee from infringement of third party's intellectual property rights due to use of Franchisers intellectual property by the franchisee. Further, the franchise agreement must enable the franchisee to optimally leverage the brand and other intellectual property rights licensed by the Franchiser and ensure continuity of supply (wherever applicable). Therefore, a clearly and properly defined business concept and format is as important for the franchisee as it is for the Franchiser. It helps the franchisee avoid implementation issues and ensure profitability of the venture. A quality franchise agreement should enable the franchisee to extract maximum support for implementation of the business concept from the Franchiser by way of training, up-gradation of concepts and evolving technologies, etc. The relationship between the Franchiser and the franchisee should be that of independent parties and the agreement must be carefully drafted to avoid an inference of agency.

Thus, a quality franchise agreement is the very fulcrum upon which the success of a franchise rests which by itself underscores the importance of 'quality' in franchise agreements.

Franchise Agreement Format, Why It's Important

The Franchise agreement format is almost universal. A franchise agreement is a legally binding document between the franchisor and franchisee. It sets in stone the agreements' terms and conditions. The thing is that most established franchise holders have an ironclad contract with virtually no room for negotiations. They present you a contract and it is what it is. The contract is there to protect the franchisor and all of it is in their favor so before you sign you need to be sure you understand every line.

The Federal Trade Commission has rules regarding how the contracts should be handled. They have set forth that a potential franchisee must be given a copy of the franchise agreement at least five business days before it is to be signed. This will allow them the time to consult with an attorney to get the contract details explained in plain English. Even if you have had a franchise before, it is best to have it read and explained by an attorney. There is no standard format for these types of agreements and each business will have something included that is vastly different from all the others.

What You Can Expect In A Franchise Agreement

Below you will find a few of the things that are generally spelled out in detail as a integral part of the franchise agreement format. You should make it a point to go over each of them with care and to make sure you understand the reason for its being there. When looking for an attorney to help you to understand a franchise agreement it is best to find one that specializes in this type of contractual law. The language used for the following items can be a bit confusing otherwise.

1. Territory - Some franchises include exclusive rights to certain areas. The contract must include details of the award and how the territory is to be defined. For example is it zip code to zip code, square miles etc.

2. Time - The term of the agreement should be clearly stated. Most franchise agreements are only good for a set number of years, most are 5-10 year contracts. If it is renewable it should also be included and what the criteria will be for renewing the contract.

3. A list of all fees and payments due - There are three fees that are common to most all franchise agreements. They are the initial fees for the franchise, royalties and marketing contributions. There may be other fees but you must make certain they are included from the top.

4. Franchise support - What exactly are the franchise holders going to do for you the franchisee. What types of training and support can you expect from the parent company? This is very important and should be in full detail in the franchise agreement.

5. Franchisee's obligations - This section shows you what they expect from you as a user of their intellectual property. Most franchises have uniformity across the country that all franchises must adhere to. This includes things like opening and closing times, uniforms, licenses, permits, suppliers hiring and training of employees and so much more.

6. Trademarks - A franchise agreement must spell out what is acceptable and unacceptable use of the franchise trademarks and other proprietary properties.

7. Advertising - most franchises have approved advertising formats that must be strictly adhered to. Your contribution to the advertising budget must be spelled out to the letter. The franchise agreement should list what the cost is and how much you are expected to contribute.

There are many other items that will be listed in a franchise agreement. It is imperative as you can see that you allow yourself time to become familiar with all the various items in the agreement before signing on the dotted line.

Franchise Agreements and Conditions of Transfer

In modern day franchising there are often situations where a franchisee, which is an individual or a franchisee, which is a corporation will wish to sell their rights under the contract to another party. A franchisor has to pay attention to these things to insure that there is no illegal or inadvertent transfer of confidential proprietary information such as secret recipes, operations manuals or marketing methods.

Indeed this stands to be reasonable to wish to monitor it, however it is not nearly as easy as it sounds as many deals, appear to be cut and dry or black and white can quickly become rather convoluted. It is so easy to accidentally allow information to slip your grasps and always difficult to control. Then there is the occasional competitor who will attempt to legally attain your secret information through owning interests in one of your franchised outlets. How do I know, well it happened to me. So, I added this expanded clause to our franchise agreement to prevent this in the future;

5.2.4 Conditions to Transfer

In connection with any transfer provided for above (which requires Franchisee's consent), the following requirements must be met to the full satisfaction of Franchisor as a condition to any transfer:

(a) The proposed transferee or its principals must meet Franchisor's reasonable requirements for experience, net worth and character, as applied by Franchisor on a nondiscriminatory basis in selecting new Franchisees and must have or obtain before transfer all licenses required by law for operation of the Franchised Business.

(b) The proposed transferee or its designee must attend and satisfactorily complete Franchisor's initial training.

(c) The proposed transferee (and each partner, member or shareholder) must have duly executed an agreement to be bound by, and to assume and perform all the duties of the Franchisee under, the Agreement (including, in the case of such partners, members or shareholders, the covenants not to compete required by Section 3.20).

(d) All maintenance, repairs and renovations required to bring the Franchisee's premises into compliance with Franchisor's standards must have been completed. All maintenance, repairs and upgrades required to bring the Franchisee's mobile units and equipment into compliance with Franchisor's standards must have been completed.

(e) All monetary obligations of Franchisee under this Franchise Agreement are fully paid and Franchisee and each of its partners, members, shareholders, officers and directors must execute a general release of any and all claims against Franchisor and its affiliates and its predecessor, sister or co-brand companies and their shareholders, officers, directors, employees, agents and their spouses.

(f) Franchisee agrees to remain liable for all obligations to Franchisor in connection with the Franchised Business prior to the effective date of the transfer and must execute any and all instruments reasonably requested by Franchisor to evidence such liability.

(g) If the transfer results in more than a fifty percent (50%) change in the beneficial ownership of the Franchised Business, then the transferee must execute the then current form of the Franchise Agreement, except that the initial term will be the same as the remaining term of the original Franchise
Agreement.

(h) The transfer fee specified in Section 2.4 must have been paid in full.

(i) Franchisee must offer the Franchised Business to Franchisor in writing for the right of first purchase. (See Section 5.5 of this Franchise Agreement.)
Before the effective date of a transfer Franchisor approves:

(a) Franchisee must agree to remain bound by the covenants in this Franchise
Agreement to not compete against Franchisor and to not disclose confidential information.

(b) Franchisee will pay all ascertained or liquidated debts concerning the
Franchise.

(c) Franchisee may not be in default under this Franchise Agreement or any other agreement between the parties.

(d) Franchisee will pay Franchisor or a registered and approved business broker, which
Franchisor may have at the time of the transfer, a ten (10) percent commission on the gross transfer price (excluding the price of real property), if Franchisor obtains the transferee for Franchisee.

Any transfer by Franchisee must be approved by Franchisor in writing. The transferee must execute the standard form Franchise Agreement then being offered to new System Franchisees and such other ancillary agreements as Franchisor may require for the Franchised Business, which agreements will supersede the original Franchise Agreement in all respects and the terms of which agreements may differ from the terms of this Franchise Agreement; provided, however, that the transferee will not be required to pay the $20,000 Initial Fee and the Marketing Area provided for in this Agreement will remain the same.

5 Franchising Lies Exposed

Although franchising is widely known to offer aspiring, new business owners the best possible chance of success with the least amount of risk, there are some myths out there that can tend to alienate even the most die-hard entrepreneur. Below, I clear up some common franchise misconceptions that will breathe new life into your goal of owning a franchise business.

Owning A Franchise Guarantees Success. You need to get clear on the myth that by owning a franchise, you absolutely cannot fail. That's a crock. There are numerous factors, both controllable and uncontrollable, that can determine the fate of your success. However, a huge statistic is in your corner: overall, the success rate of franchising is as high as 95%. Of independent start-ups, on the other hand, only about 2/3 are still in business after 2 years and, sadly, less than half survive 4 years, according to the Small Business Association. No guarantees here, but with a determined effort on your part, franchising is the obvious choice. 

Brand Name Means Everything. While you cannot minimize the importance of a highly recognizable brand name, it is only part of the equation. Brand is very significant with burger and automotive franchises. However, there are many franchise categories, some you may not even be aware of, where the brand clearly isn't the main focus, but that doesn't translate to a lack of success.  

Mr. Handyman, for example, a homeowners and commercial maintenance and repair franchise, has over 300 franchise units across the United States and Canada. The Home Improvement market is huge and continues to grow, with Americans spending more money on remodeling, renovating and decorating than ever before. The brand isn't a household name like McDonald's, but this home based franchise is a highly successful one, with a much smaller investment required. 

There are hundreds of consulting type franchises that most people have never heard of by name. Many are extremely successful, with much less overhead, than fast food or automotive franchises. 

A significant investment is involved, so the only one getting rich is the franchisor. What a joke. Franchisors absolutely need profitable, successful franchisees to flourish. The fact that ongoing royalties are paid by franchisees on a regular basis indicates that a fair an equitable relationship exists between the two parties, and that the franchise is profitable. If they weren't, who would pay these fees? A poor performing franchisee will not last very long. The franchising business model is structured specifically so that both the franchisor and the franchisee succeed.

Bigger Is Always Better. Not true, especially in the franchising world. Think about it: would you rather invest every last dime you have into a fast food business, make a decent income, and deal with high turnover, high overhead, theft, worry about what is going on at your store with the brand new teenager that is working the Saturday night shift? Or, would you prefer a home-based service franchise that costs $50,000 (or less), allows for plenty of family and free time, and generates as good or even better income than the food business? Most potential franchisees are better suited, and would even prefer, a small franchise with limited, but highly skilled, employees.

Owning A Franchise Means You're On Your Own. Nothing could be further from the truth. Yes, ultimately, whether a franchise succeeds or fails is the responsibility of the franchisee. However, a huge benefit of being a franchisee is that there is always a support staff, provided by the franchisor, ready to help you with any issue you may encounter regarding your business. Some offer 24-hour call centers. You are most definitely in business for yourself, but not by yourself. 

Because the general disposition of our society tends to be negative, positive aspects regarding anything, including franchising, can become distorted. I've focused on clearing up five of them here, although there are more, to be sure. Do your research and align yourself with an experienced franchise consultant who can provide you with the necessary facts so that you're able to make an educated decision about a specific business opportunity.

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