Top things that go wrong when entering into a franchise agreement

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Buying a franchise of a successful business can be an exciting and lucrative option for making a living. However, it is important to do your research before investing in any franchise as franchise agreements can be long and involved with many small details that can have a significant effect on your success and your future.

Initially it is important to do your research and then do more research. You will want to investigate the following areas;

  1. Learn about the success rate of the franchise you are considering in various areas near you
  2. Investigate other businesses that may be similar, or the same, as the franchise you are considering purchasing
  3. Understand the market for your franchise and the potential for a steady stream of business from local or internet consumers
  4. Talk to other franchise owners both within the franchise you are considering and others that are different from the one you are wanting to purchase

Next you need to become familiar with franchise agreements. These agreements tend to be significant in length and include many requirements and restrictions pertaining to how you will be expected to run the business, the length of your ownership, and the consequences of terminating your franchise agreement early.

  • It is imperative that you understand the cost of your initial investment and determine if your profitability will make the investment lucrative.
  • You must also consider what ongoing business costs you will have that are not included in the initial purchase price. These costs will also need to be taken into consideration when you are determining what your projected profits might be.
  • Investigate the scope and extent of the sales territory that your franchise will draw business from. Also, be sure to have a full understanding of the limitations, if any, of your on-line/internet selling territory.
  • Review and understand the terms of the lease on the commercial property that your franchise will occupy. It is important for you to know if you will hold the lease or if the parent company will hold the lease.
  • Clarify your understanding of the length of the franchise contract by determining the exact term of years for the ownership, the renewal fees, the consequences of early termination of the contract.
  • Determine if there is any restraint of trade you might be facing should you decide to terminate the agreement early or one which automatically applies at the natural ending of the agreement.
  • Check the agreement for options to transfer the balance of the franchise agreement to a new owner in the event that you are not happy with owning the business.
  • Make sure you have a full understanding of any franchise wide costs that you will be expected to contribute to such as advertising and/or social media expenses.

Because entering into a franchise agreement is complex and costly, it is very important that you are fully familiar with all of the aspects of the business you are investing in, both financially and contractually. In order to make a wise decision, it is best to do a significant amount of research including talking to other franchise owners, consulting with financial professionals and meeting with legal experts so that you have a complete picture of the practical aspects of running the business, the financial gains and possible liabilities, and the legal requirements of the franchisor and yourself as the franchisee.

If you find yourself in need of assistance with this, or any other legal issue, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.

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