Buying into a franchise is a way to take capital and possibly management experience and convert it into a business opportunity. People who start franchises tap into existing brand loyalty and receive many forms of support, such as training and large-scale marketing efforts that a startup likely could not afford. However, franchise agreements are lengthy contracts that also impose many requirements and restrictions on the franchisee.
Carefully assessing the terms below carefully can help potential franchisees determine whether or not an opportunity is actually beneficial, given their long-term plans.
1. Territory protections
The size of a franchisee’s territory and the duration of their protections can be critical terms. No matter how well-loved a business is, there is a limited amount of demand in any given market. Territory protections help limit the likelihood of direct competition from another franchisee.
2. Restrictive covenants
Franchise agreements often contain restrictive covenants that limit the economic activity of the franchisee even after the franchise agreement ends. A review of noncompete, nondisclosure and nonsolicitation clauses can help people prevent scenarios where they cannot take jobs in the industry or start their own business after running a franchise.
3. Financial requirements
Franchisees often need to invest a significant amount to acquire an opportunity. They must share their revenue with the franchisor. They may also be responsible for other expenses, such as contributions to local marketing or the acquisition of new machinery as required by the franchisor. Validating current and future investment obligations can help people estimate the investment they must make and the returns they could receive.
Working with a lawyer to assess a franchise agreement can help entrepreneurs determine if an opportunity is the right one for them. Franchise agreements are lengthy and complex, and most people benefit from having a lawyer guide them before they sign any franchise paperwork.