Franchise Agreement: Avoiding Pitfalls

Trend product 2019. Developed by the psychological center “1000 Ideas” in conjunction with the team of the business portal.

Recall that, being a legally contract of independent equal partners, in reality the franchise agreement nevertheless presupposes the concentration of most of the powers in the hands of the franchisor (franchise owner). At the same time, an entrepreneur who wants to open his own business under a franchise agreement is forced to either accept the terms and conditions or seek another partner.

Nevertheless, if at the stage of concluding the contract special attention is paid to certain provisions of the agreement, this will help to avoid many pitfalls in the future. This is especially important to remember, since almost all agreements are developed by franchise owners, which means that they are created in the interests of the franchisors themselves.

Financial liabilities
As we have already noted, usually in a franchise agreement the financial obligations of the acquirer (franchisee) consist of the payment of an entrance fee, regular deductions (royalties) and participation in advertising expenses. Therefore, special attention should be paid to precisely these issues. Demand that the contract clearly spell out what exactly you get after paying the entry fee.

In this case, vague wording of the know-how type is unacceptable. Pay particular attention to royalty payments and penalties. Perhaps they should be made more flexible? Be sure to include in the announcement a clause obliging the franchisor to provide you with an advertising budget and the ability to control the expenditure of funds.

Requirement for exclusivity
Some franchisors insist on the exclusivity of delivery: you can only work with their goods. For example, Benet-ton adheres to this principle. At the same time, there are franchisors who do not insist on exclusivity, but at the same time clearly stipulate an obligatory share of their goods. In percentage terms, it can vary from 5 to 90%.

If you were obliged to trade exclusively with the franchisor’s goods, be sure to insist on introducing a clause on penalties in respect of the franchisor in case of interruptions in supply. This will protect you from losses that you may incur in the absence of the most sought-after goods in stock at the time of high demand.

Purchase quotas or mandatory purchase minimum
At the same time, by signing the contract, you become, to some extent, a hostage to the franchisor, who can reasonably (and sometimes not) raise prices for his goods. It is advisable to prescribe a price revision procedure, although this is quite false.

You should definitely include in the contract a clause stipulating your exclusive! The right to represent the selected brand in a particular territory. In this case, you can protect yourself from the appearance of competitors. If the franchisor refuses to provide you with such guarantees, it is worth considering how profitable it will be for you to work in the same territory with a competitor who owns the same methods and provides similar services (goods) as you.

Most franchise agreements provide for clauses that significantly restrict the rights of a partner (franchisee). First of all, it is a ban on opening stores of competing chains.

The ban on the conduct of a certain type of activity after the termination of the franchise agreement.
On the one hand, it is justified. Even in the relatively small Russian practice of franchising partnerships, the practice of concluding franchise agreements with the aim of gaining access to proven methods and know-how has become widespread.

Subsequently, such unscrupulous partners terminated the contract and continued to conduct a similar business under a slightly different name in the same, already “untwisted” place.

On the other hand, by forbidding to engage in similar activities in the future, the franchisor significantly restricts the rights of the entrepreneur and actually ties him to his company. An entrepreneur who decides to terminate cooperation is forced to either change his sphere of activity or remain online.

Franchise Agreement Renewal Procedure
As a rule, a re-payment of the entry fee is not provided, but some companies still require a certain amount to be paid. To avoid unexpected surprises in the future, clearly stipulate this point at the stage of conclusion of the contract.

Serious problems can arise if you do not pay due attention to the procedure for terminating the franchise agreement. So, many franchisors, reserve the right to break off cooperation by notifying a partner, do not provide counterparties with the same right.

In other words, having received such a notification one fine day, you suddenly lose your business without the right to conduct similar activities.