Basics to Look for in Your Franchise Agreement

If you bought any kind of business, you’d expect there to be a lot of contractual agreements. That is also true when you buy a franchise. The difference is that there is some standardization in franchise agreements, as far as what information needs to be disclosed, and which does not.

Franchise agreements can be long and seemingly arduous. But they contain vital information that can tell you whether or not you’re making a smart business decision. Here are some things that you should look for and understand when looking at a franchise agreement.

Investments, Fees, and What They Pay For

Most every franchise will have an initial financial investment. That’s the number that most franchisees look at, but they often don’t look beyond that number to ask critical questions—specifically, what that fee covers.

In some cases, it is used to help pay for your startup expenses, machinery, or inventory. In other cases, it doesn’t include any of that—it’s just literally a fee.

Some franchisees will deceive you with a very low startup fee—what they aren’t telling you is what the continuing ongoing royalties or payments are and whether those payments are based on a percentage of your revenue or whether you owe them regardless of what your business may have earned.

Lowering Costs

You already know that net revenue (profit) is not gross revenue. If the net is small as compared to gross, why is that? And are there ways that you could lower your expenses, to increase your net or are you locked into the operating expenses that are cutting down on other franchisee’s profits?

Costs and Expenses

There are costs associated with running a business. These may include repair people to fix broken machinery, printing costs for marketing, attorney or accountant or other professional fees, or insurances. Who pays for these costs, or are they included in your monthly fee?

Which Vendors?

In many cases, the items you buy for the business must be purchased through the franchisor’s selected, preferred vendors. These vendors may be cheaper than what you could find—but they also could be more expensive.

Don’t assume that because you know what uniforms or machinery or food or storage may cost, that’s what it will cost. Make sure you specifically know what the franchisee’s selected vendors charge you for those things.

Speaking of competition and options, if you need financing to pay franchise fees, are you bound to borrow from the franchisor (which likely does not have great financing terms)? Or can you shop around for better rates from banks and other lenders?

Your Personal Work

How much on-site work is expected from you? Some franchises are fine with you buying a franchise, and hiring other people to run it. Others want you, personally, on site, running and managing the franchise. If you have a particular lifestyle in mind, make sure that it is what the franchisor expects from you.

Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today for help reviewing your business contracts.

Sources:

ftc.gov/legal-library/browse/rules/franchise-rule

investopedia.com/terms/f/franchise-disclosure-document.asp