As a franchisee, your franchisor will likely ask you to sign a franchise agreement. Before signing it, however, you should read over it carefully with the help of a lawyer to identify any clauses you may disagree with. Moreover, you should also look for essential provisions in the agreement to ensure the document properly reflects the deal struck. This article will outline five key terms to look out for in your franchise agreement and why they are essential.
1. Financial Matters
Before signing the franchise agreement, check the franchise’s prices and fees and consider whether it is worth paying the specified amount. The purchase price can range anywhere from $20,000 to $1,000,000 or sometimes even more. To gauge whether this price is suitable, you can look at:
- the franchise’s brand reputation;
- how big the franchise is; and
- its location.
Moreover, the agreement will state the initial and ongoing franchise fees. These franchise fees can cover:
- materials and supplies;
- marketing; and
- termination or renewal of the agreement – usually, this will be a one-off payment.
Once you know all the figures, you need to understand whether you have sufficient capital and how these fees will affect your ability to make a good profit. If you feel the purchase price or the fees are too high, you can try and negotiate it with the franchisor.
2. Grant of Rights
This clause is critical to your franchise agreement. It grants you a licence to use the franchisor’s brand name, logo, and franchise systems in your business. Without this clause, you cannot effectively run a franchise. However, it is unusual for a franchise agreement not to have this clause.
Moreover, this clause can include how long the grant will last and whether it is limited to a particular territory. If you have any issues with this part of the clause, it is best to discuss it with your franchisor. If you wish to hold the grant for longer, perhaps a renewal clause can be included in your agreement.
Continue reading this article below the form3. Exclusive Territories
Often, your agreement will grant an exclusive territory, being a geographical area in which you can operate. Before you agree to the territory, you should check how many potential customers there are and whether this amount is enough to make a profit. Further, the market proportion should be sizeable enough for your business to have growth opportunities.
Further, you need to ensure that the clause does not allow the franchisor to grant other franchises in the same area. This may directly affect your business and result in a loss of customers. Most franchisors, however, will not open two franchises in the same area as this causes the same brand to compete against each other.
4. Property Lease
Either you or your franchisor will be responsible for and hold the lease. Some franchisors prefer to hold the lease so that they have more control and will transfer the lease between franchisees. If the franchisor holds the lease, you need to clarify who is responsible for paying rent and maintenance of the property. An advantage of not holding the lease is that you can sell the franchise business without acquiring consent from the landlord.
In some cases, the franchisor may require you to hold the lease or will want to transfer the lease to you. This means you will be responsible for all the lease obligations (such as paying rent) and will increase your business liabilities.
5. Length of the Franchise Agreement
Considering the term of the agreement is vital. With a shorter period, you can ensure that you are not committed to an unprofitable business and can move on more quickly. Often a shorter agreement with a renewal clause is preferred. As a result, you have the advantage of the flexibility to move away or stay to build a successful business.
Some agreements may have a longer term, allowing the business to grow and remain consistent. Likewise, you may have a longer time to meet your performance targets.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
Before signing your franchise agreement, there are five key terms that you should look out for. Firstly, you should check whether the purchase price and franchise fees are an amount worth paying. Secondly, the agreement should contain a grant of rights allowing you to use the franchisor’s systems and intellectual property. Moreover, you should ensure that you are happy with the territories and check who is responsible for the lease. Lastly, the franchise agreement term should align with your business goals and what you hope to achieve.
If you need help with the terms of your franchise agreement, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
A grant of rights clause will allow you to use the franchisor’s intellectual property and franchise systems in your business through a licence.
A franchise agreement outlines your and your franchisor’s rights and obligations pertaining to the franchise. The contract may include clauses such as a grant of rights, leases, fees, and length of the agreement term.
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