Franchise agreement is where things are put at stake – Misinterpret it, and you’ll face the consequences for at least 5 to 10 years.
Franchise agreement can be 50 pages long, even more, and can be overwhelming to read word-by-word, especially if you are not familiar with the jargons and clauses normally used in commercial contracts. It arranges everything you could have think of, from how you should use the franchise business brand name to non-competing clauses, from how you should run your franchise unit to how to exit the agreement.
Now, as a franchisee, you would want for the franchise agreement to be advantageous for you (just admit it – you don’t want a win-win agreement) – unfortunately, this is simply impossible. You see, franchise companies build their business with sweat and tears, and want to protect it in such a way, that there’s no loophole presents. That’s why in most franchise agreement, franchisors seem to have an edge over their franchisees. I’m not against this – it’s only natural for a business to do so.
Those being said, franchisees are indeed wanting for the agreement to offer the same protection to them. Unfortunately ‘equality’ here is highly relative – I recommend you to hire a lawyer specializing in franchising to help you out in interpreting the agreement and offer you suggestions on how to proceed with the franchise agreement and signing.
One key issue in franchise agreement difficult to settle is the uniformity issues. Franchisors want each and every franchisees to do the same branding strategies, store operation, marketing tactics, etc. – all in all to make sure that the franchise units look, feel and perform the same (at least, similar) ways. So yes, if you are an adventurous type of entrepreneur, you might not enjoy working within the rigid, uniform system of franchising.
Another key issue in franchise agreement that brings headaches to both franchisor and franchisee is the renewal and termination of the franchise agreement. These questions are typical: Will you get an automatic renewal or should you face “judgment day” to determine whether your agreement should be renewed or not? Can you sell your franchise units? Should you ‘top up’ your franchise fee? What if I want to quit before the contract end? What if I want for the franchisor to buy back my franchise? And so on.
One more key issue: Profits, BEP and ROI claims. Watch for the small prints – your franchisor must let you know that those numbers are not guaranteed (if they can guarantee you a certain amount of profit, just run away!) Buying a new franchise is just like starting up a business, except you have a proven system to help you perform better. Those financials you see in the marketing materials are projections. If you want better fact, you should ask your franchisors to show real numbers from the past performance (yes, you can ask your franchisors to ‘leak’ some facts on financials.)
The best advice I can give is for you to bring your “what ifs” to the franchise agreement negotiation table – laid them out bare. It’s better to be crystal clear early on and never doubt to ask your franchisor questions (even the most basic ones, such as “Can I market outside my license territory?”) Again, never, ever sign for something you are not sure about to avoid future problems.
Ivan Widjaya
On franchise agreement signing
