The Characteristics of the Franchise Agreement

When you intend to buy a franchise, it is important for you to understand the characteristic of a franchise agreement. A franchise agreement is an agreement that governs the relationship between the franchisee and franchisor. There is no standard franchise agreement and every franchisor tailors their franchise agreement in accordance to their operation of the company and sometime, the terms of the franchise agreement could be very harsh and restrictive.

There are 6 common characteristics of the Franchise Agreement which you need to know before you enter into a franchise agreement with the franchisor:

1.Invariable Terms
The potential franchisees will choose the established and profitable franchise to start their business. When the franchisee business is booming, it is important for the Franchisor to administer/manage their franchise system effectively and profitably. Thus, the Franchisor will require the franchisees to use the same system and comply with the commonwealth terms of franchise agreement, in which you are required to sign the same franchise agreement as every other franchisee if you want to buy the said franchise.

It is common that the terms and conditions of the franchise agreement are non-negotiable and invariable because the franchisor has a higher bargain power in the relationship between franchisor and franchisee.

2. Franchise Agreement is one-sided
As the franchisor have a higher bargain power in the relationship between franchisor and franchisee, the franchisor have the upper hand in deciding the terms and conditions of the franchise agreement.

When you read the franchise agreement, you will realize that the terms and conditions drafted are one-sided. It is common that the franchise agreement is written from the franchisor’s perspective. You may say that it is unfair and/or unreasonable, but the franchisor will not negotiate the terms and conditions with any of the franchisees as the franchisor wants to protect their franchise system, including brand, operating system, trademark and intellectual property.

3. Strict Requirements
It is common that the franchisor imposes a lot of strict requirements on the franchisees. Therefore, the franchise agreement will set out the requirements compelling the franchisees to obey the franchise system strictly. Any non-compliance may amount to a default of the franchise agreement.

You should understand that every franchisor will require all franchisee to use their successful franchise system to ensure that all franchise business is profitable.

4. Restriction
Not with standing the strict requirements above, you will find that other terms and conditions are restrictive as well. The franchisor will restrict the franchisees’ freedom and conducts while operating their own franchise business, particularly non-competition terms.

It is common if the franchise agreement has this non-competition clause. The main reason is the franchisor will share their confidential information, i.e. trade secrets, know-how knowledge and operating system structures in the course of the franchise business and he does not want you to disclose and/or utilize all confidential information to third party and/or compete with his franchise at your own benefits.

You should understand that the former franchisees may commence a same business on the same street after they ceased to be the franchisees. If the former franchisees commence the same business by using the franchisor’s confidential information and/or duplicate the franchise system, this will cause serious impacts to the franchisor’s franchise business. Therefore, the terms and conditions stated in the franchisee agreement will protect the franchisor’s rights and benefits in every angle.

5. Fixed fee/sales target
The franchisor will impose certain fixed fee and/or charges, i.e. administrative fee, royalty fee, maintenance fee and etc. Some of the franchisor will fix a sales target for the franchise business and the franchisees are required to achieve the sales target within the period of time stipulated in the Franchise Agreement.

You will not surprise to discover there are terms set out the fixed fee and/or charges required to be paid by the franchisee pursuant to the franchise agreement. However, some of the charges and/or fees imposed by the franchisor can be renegotiated in respect of the amount.

6. Fixed duration
The franchisor will decide on the length of the franchise agreement. The franchise agreement will provide all franchisee a fixed duration of the franchise business, and if the franchisees intend to sell their franchise business and/or default the terms and conditions during the fixed duration, the franchisees shall required paying the compensation to the franchisor.

Some franchisors will provided a shorter duration, i.e. 5 years pursuant to the Franchise Act 1998, for new entry franchisees.

If you intend to buy a franchise, you should prepare to accept a lengthy franchise agreement with strict terms and conditions and any attempt to renegotiate the terms and conditions will discomfort the relationship between parties.