Franchise Agreement Needs Caution
This Critical Document Spells out Terms of Relationship for a Decade
The franchise agreement spells out the terms of your relationship with the franchisor and likely will be signed for a 10-year term. So pay extra attention to these areas.
- Royalty fees: Don't be swayed by merely the franchise fee. Some franchises offer low fees, but very high royalties. A franchise fee is a one-time payment while the royalties are paid monthly in most cases and are based on your sales. As you grow your business, you could potentially pay hundreds of thousands of dollars each year if the royalty fee is high. Don't get enticed by a low franchise fee and high royalty.
- Exit policies: Some franchisors can make it difficult for the relationship to be severed on good terms. Look at how your franchisor handles these sorts of exit policies. Life happens and along with that comes changes making it difficult to guarantee that you'll be able to be in the same business for the term of the agreement. So make sure you know how complex it is to get out of the agreement should the need arise. See under what terms the franchise can be sold and what level of involvement and assistance the franchisor offers in these cases. Otherwise, you may be stuck running a business that's troubled, or one that your health or family situation doesn't really allow.
- Strict guidelines: It's rare, but some franchise agreements are so strict that the contract can be severed if you paint the walls the wrong shade. Obviously, the franchisor wants to maintain certain standards across the chain and that's to your benefit as well. But make sure that these are somewhat reasonable and allow for emergencies and odd circumstances.
- Suppliers: Most top franchises have designated suppliers. But, they also typically allow outside suppliers, if they can provide the same quality of product. Using the franchisor's supplier usually brings discounts and lines of credit to the franchisees. On the other hand, though, with a guaranteed clientele, the supplier may not deliver the same quality of service as if he had to earn your business every time. Some franchisors use their own internal suppliers, or have some sort of financial stake in the supplier. This can spell trouble and may not bring competitive pricing. Cross reference this point with the Franchise Disclosure Document which will spell out any sort of financial stakes between franchisor and supplier. And make sure that you ask existing franchisees about problems with suppliers.
Again, given that this document can control your life for the next decade, it's important that you go through it carefully and that you see the input of a franchise attorney.
The copyright of the article Franchise Agreement Needs Caution in Small/Home Business is owned by Sandy Smith. Permission to republish Franchise Agreement Needs Caution must be granted by the author in writing.
