The Franchise Operation and the Franchise Agreement are Interrelated.
by Ed Teixeira
Some franchise candidates make the mistake of paying too little attention
to the franchise agreement and how it relates to the franchise operation. Here
are several important areas to focus on.
When franchise candidates find a franchise that interests them and that
franchise fits their financial, business and personal profile it’s time for some
serious due diligence. Unfortunately a number of franchise candidates fail to
see the relationship between the franchise program and the franchise agreement.
I’ve found there is a tendency on the part of many franchise candidates to focus
the majority of their attention on the operation of the franchise rather than
how the franchise agreement serves to establish the guidelines for operating the
franchise.
Here are examples of how the franchise operation and the franchise agreement are
interrelated:
1. When the franchise consists of a unique product sold to a niche market
that results in the possibility of limited demand the size of the territory, as
defined in the franchise agreement, it should be a concern. If the size of the
territory doesn’t reflect this situation than the result could be poor sales.
Yogurt anyone? In this case attempt to negotiate a larger territory.
2. If the franchisor has the right to market the same products or services
through other marketing and distribution channels, such as supermarkets or the
Internet, than a prospective franchisee should confirm that this will not pose a
risk to his or her franchise. This provision can be found in a number of
franchise agreements and should be a concern for a prospective franchisee.
3. The franchise agreement includes a sales quota or franchisee performance
clause. Certain franchise agreements include a performance provision so that a
franchisee doesn’t tie up a territory with low sales. I’ve recommended this
clause for franchisors that grant a large territory as a way to protect their
market. As a franchisee you want to be sure that a momentary economic downturn
or factors out of your control don’t penalize you under a performance or sales
quota provision.
4. The franchisor has approved vendors that the franchisee must purchase from.
One of the benefits of a franchise is the ability to provide products, equipment
and supplies through vendors at a cost and quality that the franchisee couldn’t
obtain on their own. However, there have been and continue to be instances
whereby a franchisor obtains rebates and monetary benefits resulting from
franchisee purchases. If a franchisee is required to purchase product
ingredients from certain vendors than the franchisor should do all they can to
keep these ingredient costs low. This could include passing up vendor rebates
for lower costs or passing on any rebates to the franchisees.
These are a few examples of how the franchise operation and franchise
agreement are bound together. To avoid getting involved in the wrong situation a
prospective franchisee should always engage the services of a qualified
franchise attorney. The attorney can evaluate the franchise agreement in order
to identify potential problems and where able negotiate changes on behalf of the
franchisee.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at
franchiseknowhow@gmail.com
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