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What is a Franchise Agreement
A franchise purchase agreement is an agreement where one party, the franchisor, grants the other party, the franchisee, the right to run a business that uses the name, trademark, marketing and products of the franchisor, i.e. the franchisee is looking to purchase a franchised business off the franchisor.
Franchises are a common way for businesses to expand into new markets and new locations. Examples of the franchise business model include fast food outlets such as McDonalds, Subway and KFC, hotel chains such as the Hilton and Marriott, car rental companies, car dealerships, dry cleaning shops, supermarkets, cosmetic stores, gyms, even hairdressers.
Franchisor has the control
There are several differences between buying a franchise and buying a business outright. For example, franchisors have a substantial amount of control over the way the franchisees brand, advertise and sell their products. Franchisees licence, rather than own, all of the intellectual property, such as trademarks, that go along with the franchise. This means that franchisees usually have to pay royalties to the franchisor, based on sales of the franchised product.
Franchise Agreements have a set term
Franchise purchase agreements generally have a limited duration. Franchisees only have the right to operate the franchise for the duration of the agreement and in most cases there is no guarantee that the agreement will be extended or renewed.
Do your homework!
If you are considering purchasing a franchise, you should do your homework beforehand. Educate yourself about franchising and make sure you have someone, preferably a lawyer, look over and advise you on the franchise purchase agreement before you sign it. Make sure you also research the company. The franchisor should give you the contact details of other franchisees so you can talk to them about their experiences.
Don’t be pressured into signing something without being able to consider your options first. The franchisor must give you the final franchise purchase agreement and associated documents such as the Franchising Code, a disclosure statement and an information sheet setting out the risks and rewards of franchising at least two weeks before you have to sign the agreement or hand over money.
What should be in a Franchise Agreement?
So, you are probably wondering what goes into the franchise purchase agreement. The Franchising Code sets out the rights and obligations of franchisors and franchisees. The franchise purchase agreement sets out all the other terms and conditions of the purchase.
Franchise purchase agreements need to be flexible. If the franchise agreement term is long, then chances are some business changes will need to be made along the way.
Each Franchise Agreement needs to be tailored.
Each franchise agreement needs to be tailored to the franchise. However some of the terms that should be in the agreement are:
- The parties to the agreement – who is the franchisor and who is the franchisee?
- The nature of the franchise – is the franchisee operating a service business under the name of the franchisor or a site-based franchised with equipment and stock? Is the franchisee limited to one site?
- The term of the agreement – what is the start and end date of the agreement?
- Renewal – how the agreement can be renewed.
- The franchise fees payable – there will be upfront and ongoing fees payable. These include the upfront fee to buy into a franchise, the training fees, costs for stock, store fit-out, royalties and advertising. The fees may be a fixed amount or a percentage of the business’ turnover.
- Territory rights – the franchisee will more than likely want to make sure they are the only franchise operating in the area. However as the franchisor, you may not want to limit the growth potential of your business. This is an important clause to negotiate.
- Lease – whether a lease is needed, for example over a shopfront, and who will hold the lease
- Operation – how the franchisee must operate the business
- Sale of business – Whether the franchisee can sell the business
- Disputes and termination – clauses covering dispute management/resolution and termination of the agreement
(Related read: Franchise Agreement vs Licence Agreement)
As you can tell there is a lot to think about when looking to purchase a franchise from a franchisor. You are taking a risk on purchasing a franchise (because all businesses are a risk) but we can remove any risks in relation to the paperwork. Just give us a call.
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