8 Key Questions You Must Answer When Franchising Your Business

A franchise agreement is one of the most important legal documents you will need when you start a franchise with a franchisor.

A franchise agreement is a legal document that outlines the relationship between the franchisor and franchisee. It is essential to understand all its terms and structures.

Before you have your franchise agreement framed legally with a lawyer, here are some items you need to think about within the framework of the franchise agreement. If you have a good understanding of these questions, franchising your company will be easier.

1. How much is the royalty and payment schedule?

Usually, it details how much the franchise fee will be (which you can determine in most cases from the FDD and the franchisor’s website). It also shows the franchisor’s cost and interest accrued if the fee isn’t paid on time.

To estimate the value of an industry, one looks at similar industries to determine their royalty structure. It is possible, however, to give your franchisees a break if they are just starting out and to not charge them royalty for the first three months. For new investors, this is great because it reduces the pressure to pay right away.

Often, the advertising fee, gross sales, and reporting period are also discussed in this section, which can again be used as a benchmark.

2. Who is responsible for construction?

This section contains information about the franchise and the work it involves, such as construction liability. In addition, how will signage, construction, finishes be managed, and do they match with franchisor requirements?

3. Where is the location and is it exclusive territory?

This section discusses whether you will lease the location yourself or whether the franchisor will sublease it to you. Furthermore, once the franchisor and franchisee have negotiated the details, the exclusive territory agreement is signed here.

Exclusive territories can be set by a radius from the premise location or based on population density / demographics of the area. You should be aware of what this section outlines since it will be a primary part of your operation site.

4. How many years you can operate the franchise?

Franchises in North America grant their franchisors a licence for 10 years or based on the lease terms of the location being leased. Also, a fee structure will be described for renewals. (Generally 25% of the initial franchise fee plus applicable fees)

The franchisees are often asked to remodel their business and bring it into a satisfactory state before their renewal is granted.

5. Who is doing advertisements and other promotions?

Franchisees are encouraged to participate in their individual marketing activities as well as some promotions developed by the franchisor. Furthermore, all costs associated with local business listings are listed, and the franchisor may or may not pay them.

6. How is training being done by the franchisor and are there any costs?

An “initial training” section is usually outlined with any additional training typically charged to the franchisee as “ongoing training fees.”. Franchisees may be required to undergo new training from time to time. Additionally, this section contains information about the cost of franchisee training.

7. Can I start similar business when I leave the franchise?

Franchise agreements generally contain a non-competition clause that specifies how many years/months after the franchisee has been granted permission to run the business, the franchisee may open a similar location. Most franchisors require two years plus a 10-km/mile radius from any of their existing locations.

8. How can the franchise agreement be terminated before hand?

In the event that you choose to terminate your lease before it expires, this clause will expand the details of the terms. Termination can be done if the franchisee fails to uphold quality standards or fails to fulfill their duty as a franchisee.