The franchise agreement - What to look out for
Arguably the most important step in becoming a franchise owner is signing the franchise agreement. This is a legally binding contract between the franchisee and the franchisor which details the rights and responsibilities of each party. This document will govern your relationship with the franchisor for the duration of the agreement and any differences between the parties will be subject to its terms and conditions. It’s essential, therefore, that you fully understand its contents. This is where having a lawyer - especially one who is experienced in franchise contracts - will become extremely useful.Although there will be standard provisions no two contracts will be the same as all networks will vary widely. Before signing a franchise agreement, ensure that you look out for the following fundamentals:
2) Work with a Franchise Consultant
Although there is a wealth of useful resources available online and in print, many prospective franchisees will decide to hire a franchise consultant. A good consultant will have experience in the franchise industry and will help guide you through some of the more complex hurdles and improve your chances of securing funding.
Thorough research into both potential franchises and the market you will operate in is essential in establishing the business case for your venture. It’s a good idea to look at market statistics and other readily available data to qualify the market opportunity. Also pay attention to location as some areas will be more fertile than others. Is your desired location and the business you are looking into a good match? During the stage you will slowly begin to settle on a small number of candidate franchise businesses to invest in. When you reach this stage, request as much information as possible - including any necessary application documents - from the franchisors. As with any life-changing business decision, it’s important during this stage to listen to your gut feeling and let this guide you.
4) Go to a ‘discovery day’
A discovery day is a chance for prospective franchisees to meet franchisors, learn more about their offering, and explore the opportunity of working together. Typically this event will take place at the franchisor’s office although sometimes it may be held at a franchise outlet or third party venue. Discovery days typically consist of talks given by the franchisor to further qualify their business model. They will provide more details on what the day-to-day life of running their franchise system entails - for instance what franchise training and support franchisees can expect to receive - as well as an important glimpse into the company culture. Discovery days are seen as vital elements of the recruitment process by franchisors and are usually a key touchpoint in closing the sale.
5) Consult other franchisees
It’s also highly recommended that the prospective franchisee consult current franchisees with the network to obtain a further understanding on exactly what to expect. The franchisor should be able to provide you with this information - if they don’t just request it. Ask other franchisees what the support provided by the franchisor has been like and, crucially, whether the financial projections provided were close to what they actually achieved.
6) Obtain a franchise disclosure document (FDD)
The FDD was originally introduced to protect franchisees from being misled into parting with their life’s savings by dubious franchisors. In the information age this has become less of an issue as outlandish promises can be fact-checked, nevertheless the FDD is still an important document as it tells the prospective franchisee everything they need to know about the business they are investing in. It will cover several key points, from the company’s history and key persons to fees, estimated investments costs and financial statements. Upon receiving the FDD, you’ll have a set amount of time to digest its contents and raise any comments and questions with the franchisor before proceeding.
7) Establish a location
Work with the franchisor to find a commercially viable location. The territory within which you can operate - including its boundaries - should be clearly defined in the franchise agreement. Bear in mind that the franchisor will have ultimate approval on the proposed location.
8) Choose a franchise and secure finance
It’s at this point in the process - once you’ve fully researched and qualified the opportunity - that it’s time to make the all-important decision of which franchise to buy into. Once you’ve made your decision, it’s time to work on a franchise business plan that will help secure you the franchise funding you need to cover your investment.
9) Sign the franchise agreement
The franchise agreement is the legally binding agreement between the franchisee and the franchisor which will govern your rights and obligations. The exact conditions will vary from business to business and some franchisors may be more open to negotiating terms than others. If you are unsure with any part of this agreement it’s a good idea to seek advice from a lawyer experienced in franchising.
10) Acquire insurance and permits
Depending on the market you have chosen to operate in, there may be further documents and requirements you need to obtain - for example, regulations at a city or county level. Your chosen franchisor should be able to navigate you through any additional legal and regulatory hurdles and ensure compliance.
Before opening the business you will need to make any necessary hires. The level of staff needed will naturally depend on the franchise so there is no hard-and-fast guidance in this regard, however ensure you are receiving all the appropriate training and support offered by the franchisor as this will no doubt prove essential.
12) Open for business
It’s now time to open your franchise business. Ensure, via advertising, that the market is aware of your grand opening. This is typically something you will receive focused support from the franchisor on (signage, local advertising, in-person support, etc) and will be paid for as per your franchise agreement. Oftentimes franchisors will insist on a ‘soft opening’ prior to the grand opening to ensure any teething problems are ironed out and subsequent marketing spend can be fully justified.