When you’re having a hard time coming up with a new business idea, franchising might sound appealing to you. The main reason is that you don’t have to spend a lot of money on marketing since you’re riding the popularity of an already-established brand.
Not only that, but with franchising, you’ll also get support for advertising, marketing, and even the operation manual if you want to make the franchise more popular in the local area. However, franchising isn’t so easy that anyone can just decide to do it.
Before you agree on the contract, you might want to hear some advice first and do your research. There are things that you might want to know before you buy a franchise. Here are some of them.
The Franchise Agreement
The franchise agreement is a contract that you should read before signing. In this contract, you’ll know the set amount of time for the franchise, where the company preferably wants the business to be, and how you should run the business.
It’s always worth consulting a professional if you want to know the ins and outs of the franchise agreement, especially the one you’re holding on to right now. One thing to note is that once the franchise agreement ends, the franchisor will have no obligation to renew the contract. However, if they are willing to do so, franchise agreements usually have a renewal clause discussing renewing the contract further.
Renewal Rights
In a best-case scenario, the renewal rights of the franchisor are perpetual, which means anytime, no matter how long it has been since you closed down your first franchise business, you can still renew a contract. But in reality, only a few franchising businesses have that kind of friendly renewal terms.
That said, you should check out the length of the renewal periods the business has and the number of renewals you can do after your initial one. These will be a headache, especially if you’re considering renewing your contract once your franchise succeeds.
Estimated Initial Investment
When it comes to how much capital you should have when you want to build a franchise, there should be no problem with that since all the items and the estimated money you should put are in the contract. What you should worry about, however, are the costs being understated.
The item that’s usually understated is the cost of construction. It would be a huge conflict if you pay off loan and it turns out you’re lacking in your initial investment down the road, so make sure to check up on that.
Restrictions
Of course, since the franchisor doesn’t own the brand, they can’t do anything major about it, like changing or modifying it. In short, there are a lot of things that the franchisor can and cannot do. It’s usually in the franchise agreement under the restrictive covenant.
A typical covenant would usually state terms on any competing business interests the franchisor has and a subsection that talks about the involvement they are required to have in the business’s daily operations.
However, the most important covenant falls under the post-term or, in layman’s terms, the time after the ownership has been transferred. It usually means when the contract has ended, the business has been sold or terminated. Of course, we won’t delve much further into that since franchise agreements usually write their restrictions.
Litigation History
As a business owner, you don’t want your business to be involved in any type of case in court, so before you sign the franchise agreement, you need to research the franchise’s litigation history. All you have to take note of is the number of legal cases the company has been under. But what type of legal cases should we be looking for?
You could look for ancillary litigation or cases involving third parties such as suppliers. However, you should especially note cases coming from franchisors since you’re about to be one yourself.
There’s no way to provide how many legal cases a franchise should have, so a specific standard on the number of legal cases is impossible. For example, if you want to argue about McDonald’s, they are a huge company, so having a few hundred would be “normal,” but you can’t say the same about smaller businesses.
Final Words
Franchising a business can be the highway to success, but as mentioned, it’s not that easy. There are many things to check, and even though the company is successful, there’s no guarantee that your franchise will be. Before signing the franchise agreement, you should double-check everything, from the initial investment to the renewal rights.
