5 essential things franchisees should know about their franchise agreement

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June 5, 2021

5 minutes to read

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The franchisor and franchisee relationship is a bond built on many factors, including trust. Face it, the level of risk on both sides dictates an atmosphere of honesty, integrity and conviction – where failure is imminent.

For the franchisor, it is his brand that is at stake. They must be sure that the people who represent them and their business will do so with the same passion. Franchisees also have a lot to lose, mainly the money invested and possibly other costs if they do not comply with the legal requirements of the franchise agreement.

With so much at stake for everyone involved, building and maintaining trust is essential. No one can claim that a legal contract is vital to the process. This document is designed to protect both parties and facilitate success. Here are five crucial things all franchisees should understand about their legal document.

Related: Consider The Following Before Signing A Franchise Agreement

1. Protect

the Federal Trade Commission implemented the franchise rule to facilitate fair contracts and interaction between the franchisor and potential franchisees. This rule protects everyone involved from undisclosed information or other deceptive practices.

The franchise rule requires the annual creation of a Federal Disclosure Document (FDD) that contains 23 specific pieces of information about the proposed franchise, its officers and other franchisees. Keep in mind that the franchisor has a massive investment to protect. This document may sound overwhelming with legal jargon and both state and federal mandates; however, each element is there for a reason. Additionally, you will come across a franchise agreement that spells out the details of the contract between you and the franchisor.

It’s fair to say that most franchisors want their brand to grow, so they want your franchise to be successful. The document’s requirements are designed to protect both parties from financial ruin or setback and other liabilities that could harm the brand. “One bad apple” in the whole group can cause incredible damage to the business. The contract deters these types of negative encounters for overall success.

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Buying a franchise is a monumental decision that no one should take lightly or be convinced quickly. Know your rights regarding your calendar. You must have 14 days to review the Federal Disclosure Document (FDD). An additional seven days must be allowed for the examination of the franchise agreement. The best practices for signing this binding document are to take your time and sit down with your lawyer to make sure you understand everything.

Related: How Taco Bell Is Becoming The Most Innovative Franchise In The World

3. Reasonable requirements

While the franchisor is most likely reasonable with the requirements outlined in the franchise agreement document, make sure you understand your role and obligations. These requirements must be both practical and achievable. The limitations and capabilities of each vary, so if the document describes requirements that you cannot adhere to, you should know that information in advance. You don’t want to be bound by an agreement that you can’t keep.

An example would be the financial obligation attached to your agreement. A franchisor may have requirements such as remodeling your location or rebranding at certain intervals or renewal periods. The franchise agreement document may indicate that these expenses are entirely on your shoulders. If this stipulation sounds like something you can’t honor, you need to have a conversation with the franchisor and come to a mutual agreement. Certain laws and regulations are common to all and non-negotiable for all franchise agreements. However, if your franchisor has additional requirements that don’t seem feasible, don’t get attached to that mark when signing the document.

4. Specialist lawyer

The franchise agreement document and the FDD are quite intimidating to anyone, especially new business owners. Even people who have seen these documents may be baffled by their complexity and length. Hiring an attorney who specializes in franchise agreements and well versed in scouring details is imperative.

A franchise lawyer understands your risk. They also know how to decompose the massive document and expose all its elements. The complex parts division allows you to understand your flexibility, your risks and obligations, and whether the franchisor’s demands are reasonable.

Related: Franchise 500: Our Definitive Ranking Of The Strongest Franchises Of 2021

5. Exit conditions

Most people forget to look to the future and think about what will happen if the time comes to sell the franchise. Most franchisors have specific rules for such cases, and you should know these requirements up front, not when it’s too late.

An optimal agreement will allow some flexibility. It would be best if you take a break from any output requirements that don’t have this feature. Suppose you have to sell the franchise for financial reasons. Then you don’t want the added burden of fines and other payments dictated by the agreement.

Owning a franchise is a complicated business decision that requires a level of trust with your franchisor. Beyond this understood link, people who are considering buying a franchise should do their due diligence.

By thoroughly investigating the brand and approaching the franchise agreement regarding the above five crucial elements, franchisees take one step closer to owning the business of their dreams.

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