Deciding to become a franchisee is an important decision that carries a lot of responsibility. By joining an established brand, you stand to benefit by selling tried-and-true products and services to an established customer base.
In order to do this, you’ll need to sign a “franchise agreement,” an essential document that clearly defines the relationship between you and the franchise; additionally, this document also spells out any resulting consequences. Franchisees that break the terms of their contract will become liable for their actions.
By their nature, franchise agreements are complex documents that need to be completely understood before you are ready to make a commitment.
To that end, let’s explore what franchise agreements are and how they work.
What exactly is a franchise agreement?
Simply put, a franchise agreement is a legally binding contract that explains the expectations, obligations, permissions and restrictions of the franchisee looking to open a new franchise location from the franchisor who owns the franchise.
These types of agreements vary widely between franchises, but they generally mean that the franchisee agrees to pay the franchisor fees (such as upfront fees and a regular percentage) in return for using intellectual property (brand name and trademark) as well as marketing and operational strategies provided by the franchise.
How long do franchise agreements last?
Franchise agreements are often only agreed upon for a set period of time. These usually last for 10 years, but can range between five and 25 years. During this time, the franchisee agrees to all the terms and conditions described in the franchise agreement.
Franchisees are not usually able to end a franchise agreement ahead of schedule, but they can find someone else to take over their franchise for the rest of their contract. However, getting out of a franchise agreement is not usually suggested; franchisees are often responsible for royalty fees that become very expensive to pay upon leaving.
What room is there for negotiation?
By their nature, franchise agreements are largely unnegotiable. That’s because the strength and power of a franchise comes from the strong standards to which each location must adhere. In this way, franchise’s core customers are able to enter any of its franchise locations and still have the same customer experience that has made them so loyal.
This may seem like a big disadvantage for new franchise signers, but by keeping the brand pure and unadulterated, these standards will continue to benefit every franchise location for years to come.
What is a franchise disclosure document?
An important part of the franchise agreement is the “franchise disclosure document.” This is a comprehensive list that specifically spells out the most important things a prospective franchisee needs to know before entering into this contract. These include:
- Information about the franchisor and its history
- Financing information that includes fees and initial investment estimates
- Renewal terms
- Turnover rates
- Rules and restrictions
- Items that a franchisee is entitled to
- Which territory has been demarcated for the franchisee
In Canada, this document is covered by law in six provinces (Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island), so be sure to check if your local laws apply.
READ: What is the Procedure for Buying a Franchise in Canada?
Final thoughts
Deciding to join a franchise is a big step, so take care to prepare as well as you can:
- Hire legal counsel: You’re not a lawyer, so do the next best thing and hire someone who is. There is a lot of paperwork involved in becoming a franchisee, so you’ll want someone who can explain everything to let you make an informed decision.
- Be fully aware of your territory: The only thing worse than the competition is when you’re competing against your own team. Chances are you’re not the only franchisee in your area, so you need to be clear on which area has been given to you as part of your agreement.
- Manage your expectations: There isn’t much room to maneuver with franchisors on their agreements. As they hold all the power, it’s left to the franchisee to either accept the terms, or not.
For more helpful information on franchising, try reading our blog about essential franchise questions or get the inside scoop on what franchisors look for when selecting a franchisee.
For more information on how to start franchising with St. Louis Bar & Grill, get in touch with us today.