Franchise agreement: what should you pay special attention to?

Deciding to join a franchise network is an exciting step towards running your own business, but success often depends on a single document: the franchise agreement. It is a complex contract that regulates all aspects of cooperation between the franchisor and the franchisee. Before you sign your name, you must understand that this agreement defines your obligations, rights and limitations for years to come. Not reading it carefully or downplaying key clauses may lead to costly disputes and operational problems in the future. As a future franchisee, you need to know what a franchisee should watch out for in the legal and financial context. A thorough legal analysis of this document is your responsibility – remember, the devil is in the detail.

Key financial provisions contained in a franchise agreement

One of the most important aspects of any franchise agreement is the financial side. It is not only about the initial fee, but also about a range of regular and potential costs that will burden your business throughout the entire term of the agreement. Carefully analysing these provisions is the basis of your profitability. Pay attention not only to the amount, but also to the basis on which the fees are calculated, as this may change over time.

What a franchisee should watch out for in terms of costs:

• Licence fee (royalty fee): How is it calculated (percentage of turnover, fixed amount) and are minimum fees provided for, regardless of your financial performance?
  
• Marketing fund: What percentage of your revenues is allocated to joint marketing and does the agreement guarantee that you can see how these funds are spent?
  
• Mandatory purchases: Does the franchise agreement oblige you to purchase equipment, goods or services exclusively from designated suppliers, which may significantly affect your margins?
  
• Fees for training and support: Does the use of additional training, IT systems or technical support involve hidden or additional fees?
  

Make sure these costs are clear and form part of a realistic business plan.

Rights and obligations of the parties – what a franchisee should watch out for in operational terms

What should a franchisee watch out for in the operational sphere? The franchise agreement is, above all, a handbook for running your business. It regulates the level of freedom you have in operating your company. Provisions that are too restrictive may prevent you from adapting to local market conditions. You must verify to what extent you are allowed to influence prices, promotions or opening hours.

Always carefully check the provisions concerning:

1. Territorial exclusivity: Do you receive exclusivity in a defined geographical area and, if so, how large is this area and what conditions must be met to keep it (e.g. achieving a minimum level of turnover)?
   
2. Term and renewal: How long does the initial franchise agreement last and on what terms can you extend it (is renewal automatic, or does it require additional fees)?
   
3. Penalties and sanctions: What are the consequences of breaching network standards and are they proportionate to the infringement?
   
4. Right to sell/transfer: Whether and on what terms you can sell your business (or shares) to another person and what rights the franchisor has in this process.
   

These clauses are crucial for long-term planning and for the potential resale value of your investment.

Termination and ending of the franchise agreement – the most difficult clauses

The most difficult, yet also the most important provisions to analyse are the conditions under which the franchise agreement may be terminated – both by the franchisor and by you. Understanding the exit procedures is essential for managing risk. Make sure there are clear and fair conditions for terminating the agreement on your side and that the reasons for termination by the franchisor are precisely defined and objectively verifiable (e.g. insufficient performance rather than a subjective assessment).

When is the best time to consult a franchise agreement with a lawyer?

It is best to consult the franchise agreement with a lawyer who specialises in franchise law before signing anything, including a letter of intent or a preliminary agreement. A lawyer will help you identify potential legal pitfalls, negotiate unfavourable clauses and determine what a franchisee should watch out for before you invest significant financial resources in this business model.

What should a franchisee watch out for when it comes to the non-compete clause?

The non-compete clause is a provision that a franchisee should treat with particular care. You must check its territorial and time scope after the franchise agreement has expired. A clause that is too broad may prevent you from running a similar business for many years in the region you know best, which will seriously limit your professional options once the cooperation ends.

Should a franchise agreement include territorial exclusivity?

An ideal franchise agreement should contain a territorial exclusivity clause that prevents the franchisor from opening another unit of the same network too close to your location. This is crucial for protecting your investment and ensuring you have a sufficiently large market to achieve the expected profitability and to run your business effectively.

What happens to my investment after the franchise agreement is terminated?

The conditions after termination of the agreement can vary greatly. Check whether the franchise agreement specifies that the franchisor is obliged to buy back your equipment or stock, or whether you are forced to liquidate them on your own. These provisions have a direct impact on how much capital you will recover from your initial investment in the system.

Summary

The franchise agreement is the foundation of your future business. Regardless of how much you trust the franchisor, it is your duty to fully understand each of its provisions. Remember that companies that focus on transparency, such as Rentabox24, make the negotiation and analysis process easier. Investing in legal knowledge at this stage always pays off.