I am Entering into a Franchise Agreement – What Should I Consider?

May 26, 2016
One of the biggest benefits of starting a franchise for any business owner is avoiding the worries that can be faced in starting up a business from scratch. A franchisee (the purchaser of the licence to franchise) can start a business which already has a good reputation and a sound customer base. However, as a franchisee, it is easy to be blind sighted by this when entering into the Franchise Agreement itself, and you should take all necessary steps to understand some of the key legal issues and how they could affect you:

1. Has the Franchisor provided complete disclosure?
The due diligence process is a crucial part to the purchase of any business, particularly with a franchise. The due diligence process gives you as the buyer the chance to find out as much as you can about the business before purchasing. You should seek legal advice in order to carry out due diligence which covers all bases, not only will the information found most likely be the decision maker for whether you make your purchase but information found could be used as a platform to renegotiate the price. However, in many cases, and particularly with the larger brands, the prices will be fixed and so you have to ensure you can find out as much information as possible to satisfy yourself that you are happy with how the franchise relationship and its branding will operate, and you can meet its demands. 

2. Will the Franchisor continue to provide me with ongoing support while I operate my franchise?
What about after you have made your purchase? Once your money has been paid to the franchisor, you want to ensure you have the support in place to ensure you can run the business as well as meeting their standards. Typical support includes initial training for you and all your staff, and regular meetings you may have to attend in the area. Some smaller franchises may offer a support meeting over the telephone, or even mentoring type programs to get you started. The important thing is you need to understand what you are getting throughout the term of your Franchise Agreement. 

3. What about competing Franchisees nearby?
Check what the Franchise Agreement states in relation to competitors. Usually, Franchisors want to help you succeed as much as possible to ensure they get paid their fees. Therefore it is not uncommon for you to find that the larger brands will ensure you have a certain area to operate in. However, it could be the case that other Franchisors allow others to operate nearby and the radius in which you operate in is actually quite small. Therefore, check your Franchise Agreement reflects what you had agreed and what you have in mind for opening your business and check what your neighbouring competitors are – if you are entering a saturated market in the area, this could be a risk to your business before it even starts.

4. What fees do you have to pay?
Often you will pay a fee for entering into the Franchise Agreement, and will be expected to make payments of management fees, depending on the amount of sales per month or per quarter. Do the calculations and know what your targets are to achieve that. Is it even achievable? Ask for a working example if you are unsure so you can see how it operates. If you are unable to meet the fees expected, this should indicate warning bells, however always consider having a financial cushion to allow you to get through any rough financial times, particularly when you are just starting up. Franchisors can rebrand, and also change their store or shop fittings, so be aware of when those shop refits are likely to occur during the term of your Franchise Agreement, and try to get an estimate as to the costs involved so you can plan throughout your time as a franchisee. 

These are but a few points to look out for when reviewing a potential Franchise Agreement. It is always beneficial to have a solicitor review your Franchise Agreement and make amendments according to your wishes.

If you would like to know more about our expertise in Franchising and how we can help you, contact please contact Nicola Lucas by email or call 01279 755777.

Nicola Lucas

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Nicola Lucas

Nicola is a member of our Business Law Team handling all the commercial requirements of her clients such as shareholder agreements and negotiating on commercial ...

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