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3 details to double-check before signing a franchise agreement

On Behalf of | Jul 12, 2024 | Franchise Agreements

A franchise agreement is a complex, highly-valuable contract between an entrepreneur and a company offering business opportunities. The franchisee signing the agreement effectively buys into an existing company to operate a standalone facility.

They may have what is essentially a turnkey business opportunity if they invest in the right franchise. The terms of the actual contract signed largely dictate how beneficial a franchise opportunity could be for an investor. There are certain terms that may make or break an investment opportunity.

Franchisor investments

Franchisees often look primarily at what capital they need to have on hand and whether they meet company requirements. They may focus less on what the franchisor intends to offer them in return for their efforts. A franchisor may commit to training opportunities for the franchisee and their management team members. The company may also commit to a certain amount of local advertising. Reviewing the terms that dictate the obligations of the franchisor can help a franchisee ensure they receive appropriate support while running the franchise.

Territory rules

Part of what makes a franchise opportunity valuable is running a business as part of an established brand. The new franchisee can potentially tap right into a built-in customer base. However, other franchisees might want to operate in the same community. It is, therefore, important for those signing franchise agreements to specifically look at the size of the territory the contract allocates to them and the duration of their territory protections. If they can only protect their territory for one or two years, that might mean encroachment from competing franchises in the near future.

Ongoing investment requirements

In addition to having a certain amount of capital on hand and paying for a franchise opportunity, a franchisee often also needs to commit to making regular investments in the franchise. From contributing toward local advertising efforts to earmarking a certain amount of funds for facility maintenance, there are many ongoing financial obligations imposed on those running franchises. Those obligations can eat into the profits derived from company operations.

Franchisees often need help making sense of complex franchise agreements. Reviewing a contract thoroughly before making a commitment could help protect an investment and maximize one’s return on funds committed to a franchise opportunity.

NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

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