Aspects that should be taken into account before signing a franchise agreement

In order to help those people who do not want to be involved in a spiral of debt and uncertainty, we have prepared a list of basic tips to follow. We ask that you take some time to read this decalogue and keep it in mind. Use it as a guide for action before embarking on your business adventure, in which of course we wish you the greatest success law firm huntersville.

1.Pre-contractual information.
Remember that franchise contracts are long-term. The term of validity ranges between five and ten years, with possible future renewals. Therefore, as we have said before, it is vitally important to have as much knowledge as possible about the franchise before signing any contract with it.

Before signing anything, you should obtain from the Franchisor all the information that by law ( Retail Trade Regulation Law and Royal Decree 201/2010 of February 26 ) corresponds to you. Twenty business days before the signing of the contract, pre-contract or the delivery of any amount of money.

Once again, it is essential that you give this information to your lawyer specialized in the matter, as he will know perfectly well which elements to pay more attention to.

2. Content and characteristics of the franchise agreement.
The franchise contract is an adhesion contract, in which the vast majority of the clauses and obligations of the contract are not subject to any negotiation with the franchisee. This can give rise to a series of disproportionate clauses imposed by the franchisor, which work in its favor.

The documents that make up the franchise agreement often show an alarming disproportion between the rights and obligations of the franchisor; and the rights and obligations of the franchisee. Likewise, the economic consequences of the parties’ non-compliance are different, depending on who the non-compliant party is.

It is essential that this information be delivered to your specialized lawyer, he will know perfectly well where to pay more attention.

3. Information about forecasts or business results.
Especially relevant is the fact that the standard does not require the franchisor to provide the potential franchisee with forecast sales figures or business operating results . Although, if this information is made available to the franchisee, it must be based on sufficiently substantiated experiences or studies.

This is one of the most relevant points of conflict. The franchisee usually decides to join the franchise based on the expectations of future benefits that the franchisor provides.

In general, the forecast of results is not based on a study carried out by the franchisor in that particular area. Nor in empirical experiences of the franchisor about that area where we want to open or where they recommend us to open.

The error in the absolute belief of this data or the interpretation of it is usually a common cause of the franchisee’s future failure. It is essential that this information be delivered to your specialized lawyer, he will know perfectly well where to pay more attention.

4. Essential elements of the franchise agreement.
A common point of friction is usually everything related to sources of supply (suppliers). You must know if the contract will oblige you to acquire or lease products or other types of movable property or hire services exclusively from the franchisor or from suppliers designated or authorized by the latter.

The imposition of authorized suppliers can only be understood from the perspective of benefiting franchisees by obtaining a better purchase price. Also for maintaining uniform quality throughout the franchise. Before signing any contract or pre-contract, it is essential that the document be delivered to your specialized lawyer , he will know perfectly well where to pay more attention.

If you are asked for a deposit or bank guarantee, the terms by which said guarantee can be executed must be clearly established.

In addition, any existing contracts between the franchisor and authorized suppliers must also be stated. It must explicitly include the commissions that the latter receives for all purchases made by franchisees from each of these suppliers and the benefit obtained from these concepts.

It will include the rights and obligations of the respective parties , duration of the contract, conditions for its resolution and, where appropriate, its renewal. The economic considerations, exclusive agreements and limitations on the franchisee’s free availability of the franchised business will also be included.

5. Study the location where the business will be located
The investment that the franchisee must make – prior authorization from the franchisor – to have and enable a commercial premises where the franchised business is carried out is of enormous importance. The premises must be suitable and its decoration corresponds to the uniformity of all the brand’s establishments.

You must ensure that the premises are in a correct administrative situation to be able to carry out the franchised activity.

It is essential that you know in advance if there is another franchisee in the territory assigned for the franchise. Or if the franchisor reserves the right to establish other establishments in the future, either its own or franchised.

If the franchisor reserves the right to grant new franchises or directly open new establishments, the contract must state the minimum radius or distance between franchisees that protect the new franchise. It is also necessary to indicate the minimum population that the franchisee’s space of influence must encompass.

Likewise, the restrictions that the franchisee supports must be established in the contract. Both in terms of the implementation of establishments or granting of franchises under another brand and commercial image of the franchisor, as well as the direct distribution of similar products or services through other distribution systems.

All of this requires defining the possible rights of the franchisee regarding the right of first refusal and withdrawal that it may have on new franchises that are implemented in its territory. Territorial restrictions affect the ability of you to seek or serve clients outside your contractually defined territory . They also affect the possibility of accepting orders or assignments from clients outside this territory.

6. Everything related to advertising and business promotion
Most brands establish a periodic payment for all franchisees. The purpose of this is to jointly promote the franchise’s advertising and carry out actions that may benefit the brand as a whole. This advertising is generic for the brand and does not directly affect the sales of each of the franchised establishments. This fee is also calculated on the sales volume of each of the franchisees.

7. Make the corresponding payment
Make the payment to the franchisor of an amount as an adhesion fee or entry fee into the franchise. The payment of these amounts is usually required in one go and definitively. That is, whatever the evolution of the franchise contract, the franchisor is not obliged to return these amounts.

Conclusions on the franchise agreement
All the information mentioned above will allow you to form a criterion to freely choose your membership in the franchise network of the brand that best suits you. Thus, you will be able to assess in depth each and every one of the personal, economic, financial and legal circumstances that guarantee your success in operating the business.

Otherwise, your future as a franchisee may be flawed and the decision you make may have serious economic and personal consequences. Remember that the initial investments for a franchisee range between about €15,000 and €500,000, depending on the franchise’s activity and the franchising brand.

Taking all these aspects into account, you will be able to sign your franchise contract without any problem. Additionally, you will be guaranteed peace of mind knowing that if something goes wrong in the future, your law firm will be able to defend your case with all the tools and resources it needs to achieve a good defense.

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