Franchising – What should be in the contract?

Many of you seem to be looking at franchising to get into business, while this can be a relatively painless start to your own small business, caution is essential. I thought I write down some pointers of what you should have in any franchise contract, this is not a nice to have list, but the bare essentials. This list could easily be much longer, depending the area you work in:

  • Sell/transfer – you need to have the right to sell or transfer the ownership of your franchise at will;
  • Products & Services – obligations to the franchisor, for example buying products and services;
  • Territory – exact and precise boundaries of your franchise territory;
  • Training & Support – this is why your are doing this, so make sure you get what you need;
  • Pricing – exact and precise pricing, commissions or rentals of all product and services;
  • Termination – make sure you can get out if you have problems;
  • Investment – how much and when do you need to invest.

This all should be based on previous exhaustive research and information gathering on the franchisor.

  • Companies financial health, history and management team;
  • Bankers and other professional advisors to the franchisor;
  • Companies track record, how long has it been going;
  • failing that precise details of pilot operations;
  • detailed description of franchise and territory;
  • number of existing franchises and the right to talk to any of them;
  • Initial and any other payments to franchisor;
  • realistic business planning data, cash-flow, profit and loss;
  • find out how exactly the franchisor makes their money;
  • realistic working capital need, long term viability of franchise;
  • take a bank reference;
  • training and support guarantees from the franchisor;
  • help with raising finance;
  • restrictions if there are any;
  • get a sample contract.

Again this list is not exhaustive, but should help you to get started. Every-time during your evaluation period if you have a question, write it down and ask. It is a bad sign if questions you have will or can not be answered. Do not fall for pressure sales tactics. You should walk if your questions are not answered without a good explanation or any of the following happens:

  • Says: “Act now to get in while it is still cheap”;
  • If it is all too easy with huge profits from day one;
  • any problems with franchisors directors or officers;
  • demands large up front license fees;
  • does not know the market they are operating in;
  • evasive on access to existing franchises.

A franchise can be exactly what you where looking for, but it can also turn out to be a nightmare, like any business you need to be careful and do not get carried away by the sales pitch. Talk it though with an accountant, to make sure the figures add up.

If it sounds to be too good to be true, it …….. . ST.

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