How To… Understand your rights as a Franchisee
The Franchise Agreement is a document that effectively defines a relationship between a franchisee and Franchisor. This vital document is placed in high esteem as potentially being the most valuable piece of franchise documentation that you may possess as a franchisee.
Parting with your well-earned cash to set up a new business will inevitably invite an element of risk. One of the many advantages to the franchising model is the fact that you’re joining an established franchise network that has proven it has a tried and tested formula. We must stress that this doesn’t guarantee success and we do stress that you undertake thorough due diligence prior to investing in your chosen franchise business.
Key rights as a franchise to understand -
Pilot Franchise Operation
It may be the case that the franchisor you’re engaging with has previously set up a pilot franchise, this would then allow him to the business operating system, and should in theory be able to provide details of its operating performance for you to analyse as a prospective franchisee. You should look carefully at the results shown and truly understand whether these truly reflect the potential of an area that you’re seeking to invest within. It’s key that you fully understand the full level of support that was provided to the pilot franchisee as these may have changed since.
Financial Projections for the franchise
Any prospective franchisee should be provided with profit and cashflow forecasts by the franchisor, and you should fully investigate and understand all of the figures presented. Ensure that there is clarity with the data and whether it demonstrates the performance of a pilot franchisee or that of another franchisee.
Franchise Costs
The majority of Franchisors will require an upfront payment, usually known as the an Initial franchise fee and you’ll then be required to pay an ongoing Management Service fee (usually monthly) to the franchisor as well. The Management Service Fee will cover nationwide marketing, operating systems etc. it’s crucial that you understand other costs such as premises, franchise launch promotion, franchise training and so on. The Franchisor should reflect these costs within the original business plan that they have present you with.
Services and products provided by the franchise
If the franchise operation is reliant on sourcing products or providing a service, then the franchisor must be able confirm that they can meet your (prospective franchisee) requirements and needs or that an agreement is in place whereby suppliers are approved.
Initial and ongoing franchise support
Franchise Support can be defined and either training, marketing provided, promotional activity with your franchise or regular franchise meetings (franchise training days) are vital to the success of your franchise and you have the right to receive adequate support to ensure your new franchise business thrives. Your chosen franchisor should be able to provide details of programmes of support, and existing franchisees within the franchise network should be able to reaffirm this if required.
Intellectual Property rights as a franchisee
At the very epicentre of franchising is the right of an individual to invest into a franchise model that in return grants them the right to use the franchisor’s brand. Having the use of the franchisors brand is vitally important for the success of your franchise, and you must obtain assurances from the franchisor that the trade marks and other rights that relate to the operation of the franchise business are not restricted or even threatened by the rights of third parties.
Your rights within The Franchise Agreement –
This detailed document effectively polices the bond between the franchisor and the franchisee. Although the franchisor may have made initial assurances whilst negotiating the sale of the franchise, you must ensure that these are reflected within the actual Franchise Agreement. Key areas to look carefully at are as follows:
The Franchise Term
This is key as the franchisee needs to ensure that the agreed/proposed term within the agreement is a sufficient period, to obtain a return on their initial franchise investment. It’s also key to understand that the value of the franchise will deteriorate towards the end of the initial term where there is no agreed right to renew the franchise.
Franchise Renewal
The right to renew your franchise agreement is seen as being vitally important as it will give you the opportunity as the franchisee to secure the ongoing benefit from a thriving franchise. You must understand that there may be costs to take into consideration when renewing the franchise, in terms of either renewal fees or costs to enhance/modify the franchise system or even introduce the franchisors latest version of the Franchise Agreement that will continuously be updated.
Franchise Territorial Rights
The majority of franchise sales will involve an exclusive territory allocation (the right to an exclusive area) to be granted, and it’s vital to understand whether the territory could be reduced, or exclusivity withdrawn, this should be included within the franchise agreement.
Franchise Training and Franchise Support
The franchise agreement should include all initial franchise training and support to ensure a successful launch of your franchise, that will be provided by the franchisor and who will cover this vital service.
Franchise Products and Services to run the franchise
Will the franchisor be obliged to provide specific products or services on competitive terms to ensure you can fully operate your franchise?
Right to sell as a Franchise Resale
As the franchisee will you have the right to sell your franchise? If you are, what restrictions or conditions apply with the proposed franchise resale. For example, does the franchisor have the right to reject any application for the franchise resale, where the any prospective purchaser does not meet the standards and expectations of the franchisor to fit into their franchise network.
It is important to take advice on the Franchise Agreement because it is highly likely that the franchisor has advised that the terms of their Franchise Agreement are standardised and it is unwilling to change the franchise Agreement. That may be the case although it is not unusual for franchisors to agree minor amendments (and sometimes substantial amendments) by way of a side letter or supplemental franchise agreement.
You have the right to consider any serious deficiencies which might cause you to question any decision to proceed within the franchise network, such as:
- • hidden or unreasonable costs;
- • restrictions on the franchisee in sourcing products or services from third parties;
- • requirements for the franchisee to invest in goods and equipment;
- • unusually harsh termination provisions;
- • unreasonable conditions on renewal.