10 Provisions In Your Franchise Agreement That Deserve Your Attention
So let's say your dream franchise has been chosen, your franchise application and loan have been approved, and all that remains is to sign the franchise agreement. Don't let excitement precede judgment, for this is the time when attentiveness to detail is most critical. Make sure to review all documents and be ready to negotiate - your choices now will have impacts for years down the road.
Here are 10 provisions that every potential franchise owner should try to keep on their own terms.
A guaranty is a pledge used as security to fulfill a debt. Franchisors want all potential franchisees to sign a guaranty and are also known to solicit the spouses. It is important to try to avoid any type of guaranty and stop any co- spouse agreement cold in its tracks. Agreeing to a guaranty pledge will put your personal assets at risk. If a guaranty is inevitable, try suggesting a limit to the guaranty duration or to the size of financial exposure you are accepting.
Make sure the franchisor offers adequate support in the event that a third party files a trademark infringement claim. This includes covering all costs of damages and any rebranding. The trademark is a major component of what you are paying for in your fees and royalties as a franchisee, and no franchisee should be held responsible for a franchisor's mistake in this critical area.
When studying the sale and assignment of a franchise agreement, consider the following conditions: Look at the transfer fee and make sure it is reasonable and only compensating the franchisor for their fees. Try to keep to the current agreement instead of signing for a new one, as the agreements may differ.
Just as with the transfer clause, the provisions for renewals may specify that franchisors reserve the right to offer a new contract. Communicate your desire for consistency and also make sure the renewal fee is not excessive. If you achieve great success in your franchise unit, you do not want to be subject to dramatic changes in terms when you look to renew your franchise license in 5, 7, 10, or more years.
Franchisors will want the right to modernize units during the term. Negotiate a comfortable interval between each renovation. Furthermore, make sure that the expense is capped. Any modernizations should be system-wide, so you are not bearing higher costs than your peers elsewhere in the region or country.
Electronic Funds Transfer
Franchisors often have access to franchisees bank accounts for royalties, advertising fees and other obligations. Try to eliminate this. There is no reason to expose financial stability to the chance of critical errors. If it is inevitable then open a fresh business account that the franchisor can access, keeping your personal bank accounts safely separate.
Do not sign any agreement that allows franchisors access to inspect your premises without notice. Make sure to specify adequate times as well as a time of notification. Surprises should be reserved for birthdays, not venue inspections.
Limit the frequency of auditing. Royalties and/or advertising fees are based on a percentage of sales. Franchisors want the right to audit records to confirm the accuracy in payments. If a shortage is discovered, the franchisee will suffer a large penalty. Therefore, ask to limit auditing and ensure that any discovered errors do not result in large penalties. At the very least, you should have an opportunity to correct your first few errors. There should not be any punishment for an honest mistake.
Franchisors should not promote internal competition. They should provide their franchisees with exclusive territories, free from encroachment. On the other hand, be careful of carve-outs that include airports, colleges and hospitals. Franchisors will often try to increase revenue by placing a franchise outside of an institution as well as a franchise within. (Always check the fine print for this clause).
Be aware of the use of direct mail, catalogs, supermarkets and other “alternate channels of distribution.” This will always affect small businesses at no cost to the franchisors, because customers will be able to order directly from the warehouse. Try to avoid performance minimums that requires a quota of sales to maintain a solid territory. There are cases of franchises reducing territories because a franchisee fails to hit the minimum sales quota.
A franchisor should not terminate an agreement without notice. Provisions for termination with notice should only result in severe cases. In addition, ask for a sufficient grace period that allows time to plan for the hard times ahead
Entire Agreement (Bonus)
All contracts have a summary of the entire agreement; however, sneaking in provisions is common; however, these regulations cannot be enforced if they are not outlined in detail before. The summary should not be embellished in any way, even if it looks like a clause that is more beneficial to the franchisee. Eliminate all deviations.
Remember that this advice is only the tip of the iceberg. Potential franchisees will be best served by retaining the guidance of a qualified franchise lawyer. Remember, you are making a very substantial investment and this decision deserves your time and attention.
This article was written by Kenneth F. Darrow, who has been practicing law for over 40 years, and is recognized nationally in the field of franchise law, with over 30 years experience in that area. Read more about the Law Firm Of Kenneth F. Darrow, P.A. at http://www.kfdarrowlaw.com/.
To learn more about franchise opportunities and business opportunities visit us at FranchiseHelp
Talking with Current Franchise Owners
Reading through a FDD is a key part of your research, but it can’t answer all the potential questions you might have about how it is to actually operate a given franchise. The best way to do this is actually to start talking to current franchisees. The best way is to this is to call or visit a franchisee, don’t just email them. You might need to be a bit persistent, but if you are then you can get all of your questions and concerns answered.
Why Do Companies Franchise?
The most successful entrepreneurs, however, eventually come to recognize that achieving long-term success requires that they step back and put in place the right systems, processes, and people to expand their company beyond what any one individual -- no matter how motivated and sleep deprived -- could possibly manage on his or her own. Once a business owner sees what's possible when employees take on operational responsibilities that free management to actually manage instead of act like their own employee, he or she quickly understands the enormous power that scalability means for a business.
10 Tips for Trademark Selection
In the past few weeks, I’ve discussed what constitutes trademark infringement, how to protect your image and intellectual property online, and some recent developments in the law regarding use of competitor keywords in search engine marketing. This article goes back to the fundamentals, and discusses ten tips for selecting a trademark.