Franchise agreements are usually lengthy and detailed, but it is not something you should take lightly and sign without understanding it properly
Franchising is an attractive business opportunity for budding entrepreneurs. Before you purchase a franchise, you will have to sign a deal, also known as “Franchise Contract” or “Franchise Agreement”. Franchise agreements may regulate business aspects such as advertising, signage, pricing, store design, store location, etc.
Franchise agreements are usually lengthy and detailed, but it is not something you should take lightly and sign without understanding it properly. As there are no specific laws in India governing the franchising industry, it can prove to be fatal for the franchise if the agreement is not made with proper precaution. Thus, here are 5 things you must know before signing a franchise contract.
Each franchise location covers a certain area, which is spelt out by the franchise contract. Other franchises cannot have their locations within a certain number of miles. This is done to make sure there isn't too much competition in the area, which can limit sales potential and the success of the franchise location.
Term & Renewal
Franchise agreements usually provide a fixed franchise term of 5 to 10 years. Some of them have renewal options also. Owning to the high amount of investments by the franchisees to acquire the franchise rights, it is necessary to have a long-term contractual relationship.
Also, to achieve great success with your franchise unit, make sure the renewal fee is not excessive. Review your franchise agreement by a legal counsel before signing it.
It is necessary for a franchisor to ensure uniformity and consistency across all franchisees’ operation. Initial training is the best way for the franchisor to communicate its core concepts and standards, set forth in the agreement, to new franchisees.
It is the duty of the franchisor to provide as much support, training and supervision as required by the franchise. This must be mentioned in the franchise agreement as well.
Advertising & Marketing
Franchisors conduct continuous marketing and promotions to increase their brand power and visibility. Usually, the franchisor promotes the brand, and the franchise is responsible to contribute by taking part in brand building activities.
The franchise agreement should also cover the aspect of advertising and brand promotion. It should also include the advertising commitment and what fees franchisees are required to pay towards those costs.
Selecting the right franchise model is crucial for the success of your business. Each franchise has specific rules for the way franchisees must run their units. There are various franchise models that a franchisor can opt for running their units. Dig deep into the details, and know about the franchise model and how does it align to your visions and goals, how much freedom it allows you while running the franchise etc.
In addition to initial fees, franchisees have to pay an agreed share of the percentage of its sales. There are various structures of royalties used by franchisors, but most of them require franchisees to pay an ongoing royalty, usually a percentage of total sales, typically on a monthly basis.
It must be mentioned in the franchise agreement, the percentage & type of royalty, mode of payment and due dates as decided between the franchisor and franchisee.