If you are considering buying a franchise, you need to understand the key elements of the franchise agreement and disclosure document. These are the legal contracts that define your rights and obligations as a franchisee, as well as the franchisor's role and responsibilities. Here are some tips on how to identify the most important sections and clauses in these documents.
Before you sign the franchise agreement, you should receive a franchise disclosure document (FDD) from the franchisor. This is a document that provides detailed information about the franchisor, the franchise system, the fees, the training, the support, the financial performance, and the risks involved in the franchise. The FDD is regulated by the Federal Trade Commission (FTC) and must follow a specific format and content. You should review the FDD carefully and ask questions if anything is unclear or missing.
Before you are ready to sign you should have done your DD - including researching ex franchisees- successful franchisees - ask to work in a operating environment to put yourself in what your future may be - have enough finance to survive- don’t be a - if I had known this before I committed … Look at it from every angle . As a guide spend one hour doing DD for $x dollars spent depending on the purchase price.
Get the financial disclosure vetted from your accountant. Review the fee and training against the financial obligations you would be required to meet and see how best you will be able to mitigate the risk of under performance.
In the Netherlands is this a PID document. Gives the franchisees insight of the franchisor and is since 1 January 2023 obligated by the Dutch Law.
I read one of the franchisor's FDD from USA when I assisted a master franchisee to be for my country, Indonesia. It is very useful in many ways, i.e. I can understand how many outlets opened and closed in each state, and surprisingly it was good in Northern states but not in Southern states. I can draw a few assumptions (this one I am not sure whether it was from the FDD and/or from other materials) to develop a financial projection for the development plan, to calculate the feasibility of the fees charged by the franchisor, and the required capital. In my country, the local franchisor's disclosure may not be as comprehensive as in USA, but a mandatory financial report of the last 2 years could be the most useful information to explore.
This step is crucial but can sometimes be overwhelming. Standard FDD's are often 300+ pages and most folks won't read it as carefully as they should. Make sure you receive it early in the process so you can review it over the course of some time. Also, every FDD will have the Franchise Agreement and sometimes a Multi-unit agreement in the exhibit section. Those are the actually documents you are bound to so reading those are paramount and having a lawyer read over them for you as well will be important.
The franchise agreement is the main contract that binds you and the franchisor. It outlines the terms and conditions of your franchise relationship, such as the duration, the territory, the fees, the standards, the obligations, the rights, and the termination. The franchise agreement is usually more favorable to the franchisor than to the franchisee, so you should pay attention to the clauses that may limit your flexibility, profitability, or autonomy. For example, you should look for clauses that restrict your ability to sell, transfer, renew, or exit the franchise, or that impose excessive fees, penalties, or royalties.
Also, make sure you have proper insurance to mitigate your risk. Sometimes Franchisors might ask you to get Guarantors to mitigate any financial risk they foresee over non-payment.
A Franchise agreement is a one sided document , any established system should not negotiate or vary the terms , do your full DD sign it and put it in the bottom drawer. If you need to get it out you have a serious legal issue .
While it is one sided as others have said, it is the franchisor that is risking their reputation and brand and has the biggest need to protect themselves. Potential franchisees need to remember that franchisors motivation for restrictive terms and clauses isn't to negatively impact the relationship. In fact, it is in their best interest for their franchisees to be successful and profitable.
Terms disclosed in the FDD must be the same as the terms in the Franchise agreement. If there is a discrepancy, that is a red flag.
There are over 18 acts / laws that comes into play while franchising any business in India and which you must consider while creating a draft franchise agreement in India. Indian Contract Act, 1872, Consumer Protection Act, 1986, Trade Marks Act, 1999, Copyright Act, 1957 The Foreign Exchange Management Act, 1999 (FEMA), The Competition Act, 2002, The Trademarks Act, 1999, The Patents Act, 1970, The Design Act, 2000, The Income Tax Act, 1961, The Arbitration and Conciliation Act, 1996, The Specific Relief Act, 1963, The Information Technology Act, 2000 are a few important ones to name. International brands must get their franchise agreements redone to ensure enforceability and compliance in India.
One of the key elements of the franchise agreement is the initial fee and the ongoing fees that you have to pay to the franchisor. The initial fee is a one-time payment that covers the cost of joining the franchise system, such as the license, the training, and the equipment. The ongoing fees are the recurring payments that cover the cost of operating the franchise, such as the royalties, the advertising, and the support. You should compare the initial fee and the ongoing fees with other franchise opportunities and evaluate whether they are reasonable and affordable for your budget and expectations.
When looking at the initial franchise fee take into consideration the length of the agreement and what rights you are being granted via that fee. As a simple example, a $50,000 initial fee is like adding $10,000 expense per year to a 5-year agreement vs. $5,000/year for a 10-year agreement. Other considerations: how much training are you getting, what is the support plan to get your business open, what expenses are included and additional fees you will be paying to the franchisor etc. For ongoing fees, they are typically a percentage off of your topline revenue, so you owe them whether or not you are profitable. The franchisor expects that to be paid and you are contractually obligated to make those payments.
Remember there are a lot of ongoing fees - Initial fee - check the term and the renewal fee if any if it is $50K and lasts 10 years and every extra term is another $50K that's $5K a year you have to allow - Ongoing fees -Licence fee and promotion fee ,generally a fixed % of turnover - to pay this you should get benefits to lesson other costs , cheaper ingredients , strong advertising-true ? Other fees Rebates - a rebate on everything the franchisee purchases - often not disclosed most systems of Gold standard don't move the dial into this being unfair Marketing - many systems take a large % on adim fees , how much % of every $ collected gets spent on driving network sales ? there are heaps more hidden fees do your DD
All financials including franchise fee, ongoing fees, royalties, commissions, security deposits and interest and other penalties must be clearly enumerated in all India franchise agreements.
Another key element of the franchise agreement is the territory and the competition that you will face as a franchisee. The territory is the geographic area where you can operate your franchise and where the franchisor will not grant another franchise. The competition is the other businesses that offer similar products or services to your franchise. You should check whether the territory is exclusive or non-exclusive, and whether it is fixed or variable. You should also check whether the franchisor can compete with you directly or indirectly, or whether you can compete with other franchisees in the same system.
In places where there is a non-exclusive agreement or where the territory is defined to an area, ensure your contract has a minimum price mechanism so you are not outbid by the franchisor or other franchisees for pricing and a healthy competition is maintained.
Whether you are following a pin code system or any other geographical demarcation method in India, they must be clearly mentioned in the agreements as annexures. In addition, deal with multiple franchises and company-owned presence in specific geographies very clearly in the agreements as well.
A major benefit of buying a franchise is the training and support that you will receive from the franchisor. The training and support are the services and resources that the franchisor will provide to help you start and run your franchise successfully. The training and support may include manuals, courses, coaching, mentoring, online platforms, technical assistance, marketing materials, and quality control. You should verify what kind of training and support you will get, how often, how long, and at what cost. You should also assess whether the training and support are adequate and relevant for your needs and goals.
While creating the franchise agreements in India, Please add specific clauses that cover the training, marketing, operations, and other support and define the same in the roles and responsibilities of the franchisors and franchisees while connecting the manuals and other sops to the agreements.
This is one of the key elements potential franchisees should be concerned with. A franchisor should be providing adequate training to help you get started, as well as regular ongoing support. It is one of the best advantages of buying a franchise and shouldn't be overlooked.
A final key element of the franchise agreement is the dispute resolution process that you and the franchisor will follow in case of any conflict or disagreement. The dispute resolution process is the method and the venue that you and the franchisor will use to resolve your issues, such as mediation, arbitration, or litigation. You should be aware of the advantages and disadvantages of each option, and the costs and risks involved. You should also check whether the dispute resolution process is fair and balanced, or whether it favors the franchisor over the franchisee.
You should avoid inclusion of payment disputes to arbitration as it may result in further delay in payments. Payments must always have absolutely terms that are time sensitive.
The most kmportant thing for the potential franchisee is to check with franchisee in another company is happy with the services of the franchisor and how the brand is performing in that market.
Make sure there is an exit clause, which covers the termination notice period, disposal/ transfer of asset, inventory and information, transition/ dismissal of staff, cure period, dispute resolution, and any other right and obligation upon termination.
One of the most important elements of a franchise agreement is language. A good franchise agreement should be written in plain English. In my experience, many franchisees (and even franchisors) struggle to understand their franchise agreements. That's because franchise agreements are written by lawyers to stand up in court should any dispute arise. But a franchise agreement is a relational agreement - that is, it is the foundation of the relationship between the franchisor and franchisee over a long period of time. How can a franchisee understand their obligations and rights if they can't understand the agreement? I'm not a lawyer but I use my experience to write easy-to-understand franchise agreements and have them ratified by a lawyer.
Things you MUST be getting as a franchisee: Really good and sufficient training, on-going support, a strong brand with federally registered trademarks (and the franchisor should be agreeing to defend third-party claims related to the marks). If any of these are missing or insufficient - walk away.
Here are my top 4 tips once you have purchased the Franchise and want to make money and have fun 1.If its your first franchise be 100% committed don't own other businesses / devote yourself 100% working in the business with your partners full support 2.Don't over financially gear up- less than 50% is best , allow enough working capital for the start up period 3. Be a raving fan of the brand/system love the culture , network 4. Work hard and follow the system , don't argue with Head office - follow their guidelines