Reviewing Your Franchise Agreement

So, you’re looking at a once-in-a-lifetime opportunity through franchising. Investing in a franchise can be profitable to prospective buyers and comes with other benefits, such as being your boss and operating a business under the name of a trusted brand. However, you’ll need an attorney to review the franchise agreement to protect your interests.

Most people forget to review the finer details of their franchise contracts, which may hurt their interests in the long run. Also, evaluating the terms of a contract can be challenging if you are not experienced, and that’s why prospective buyers should consider hiring an attorney to review the franchise agreement to avoid exploitation and future disputes.

Consulting a Franchise Attorney

The standard advice is to involve a franchise attorney before signing the franchise agreement. A franchise lawyer can help in various ways, including:

• Reviewing the franchise contract document for inconsistencies;
• Reviewing the franchise contract for onerous clauses and non-compliance with the Franchising Law;
• Reviewing a franchise agreement for unfair and one-sided clauses that typically favor the franchisor;
•  Helping the franchisor draft an agreement that’s compatible with the provisions of the Franchising law.

Other things to look out for can include:

1.  Terms of the Agreement

Terms of the agreement include:

• The franchise term;
• Duties and obligations of both parties;
• Franchise fee;
• Rights and restrictions of the franchisee;
• Dispute resolution mechanism, and others.

2. Itemization of Expenses

The Disclosure Document should disclose all the expenses a buyer (franchisee) will incur before. Itemized expenses help the franchisee prepare a cash flow forecast, a comprehensive budget, and a business plan.

3. Success Rate and Location of Existing Franchise Outlets

The success of a franchise can be evaluated by reviewing the number of existing outlets, location, and turnover rate of the existing outlets – the specifics to look out for can include:

• The turnover rate or transfer rate–a high turnover rate suggests the poor performance of the franchised business;
• Existence of legal disputes against a franchisor;
• The location of other outlets versus performance will give you an idea of the locations to consider.

4. Transferring or Selling Business Interests

The applicable provisions or rules for selling or transferring the business interests are specified under the transfer clause in most Franchise Agreements. Ensure the contract allows you to sell your franchise if you’re no longer interested in the business.

Franchising typically involves a long-term commitment in which the terms of a franchise contract impact success. Consequently, reviewing a franchise agreement should be prioritized before franchisees commit themselves.