34 ways to fail with a poorly written franchise agreement
May 2, 2013
DUBAI — Franchises can fail for a variety of reasons from choosing the proper real estate to finding the right partners, but some will fail before they even get that far, Saudi Lawyer Sharif Akkad said last week during the International Franchising Forum. He hosted a session called, "Can a Poorly Written Franchise Agreement Affect the Success of the Business," during which he gave franchisees tips on drafting successful agreements.
Do your homework
Although it may sounds obvious, Akkad said many franchisees don't fully investigate their potential partners and end up with master franchisors who don't support them when it comes to marketing and training. He suggests hiring a franchise consultant familiar with the industry who knows about the company's reputation. He also said a franchisee should carry out all legal due diligence about the contracting party by hiring a specialized franchise lawyer to oversee the contract.
And don't stop there.
"The FA has to be prepared, negotiated and reviewed by a specialized franchise lawyer in the territory," he said. "The proper drafting of the FA is [even] more important in the countries where there is no detailed franchise law."
A solid FA will have the following:
- Disclosure of pre-contractual information;
- Specifics location info on the territory;
- Any info regarding Restricted Areas;
- How and what type of initial and ongoing support the franchisor will provide;
- IP rights;
- The nature of rights granted to franchisee (exclusion of exclusivity, etc.);
- Whether the franchisee has rights to wholesale the products outside the unit;
- The right of the franchisor regarding direct sales of the franchised products;
- Duration of the franchise agreement;
- Duration of the renewal of the franchise agreement and the number of renewals;
- The conditions of renewing the franchise agreement and the renewal fees;
- Prices of products and services and the percentage of the marketing levy;
- The marketing materials to be provided by the franchisor;
- Authorized suppliers of the products;
- Details of initial and ongoing training;
- Conditions and criteria for choosing a site to conduct the franchise business;
- The construction designs and conditions to outfit the franchised unit;
- Deadline for the franchisee to rent and open the stores;
- The terms of the lease agreement of the franchised unit;
- Renovation of the franchised unit;
- The fees imposed on the franchisee (royalties, franchise fee... etc);
- Terms of payments of the fees and products' prices;
- Who bears the taxes (withholding tax);
- The definition of the term turnover;
- The minimum purchase amounts;
- Any penalties and guarantees;
- The responsibility of the master franchisee to control the sub-franchisees;
- Right of the franchisor to inspect the franchised unit;
- Setting and accepting orders for the products;
- The shipping and risk regarding the products;
- Specifying the competing brands;
- Assignment and change of ownership;
- The consequences in case the agreement between the franchisor and the master franchisee is terminated; and
- The rights of the sub-franchisee if the franchise agreement is signed with the master franchisee.
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Cherryh Butler has been a reporter for nearly 10 years, writing on a variety of topics ranging from the restaurant industry to business and health and fitness news. Before joining FastCasual.com as editor, she oversaw KioskMarketplace.com and PizzaMarketplace.com and contributed to RetailCustomerExperience.com. She's also written for several daily newspapers, magazines and websites, including The Kansas City Star and American Fitness magazine.