A restaurant franchise agreement can be a dense and complex contract. But, whether you have a lawyer or whether you are going to handle the agreement yourself, there are a few crucial items that you should be aware of so that you can make sure they are properly negotiated.
Keep reading to find out about some of the most important items that are included in a restaurant franchise agreement.
A franchisee’s territory is the area in which the franchisor vows not to be open up another location. Within your territory, there will not be any other stores of the same brand to compete with. For extremely popular brands, such as McDonald’s or Starbucks, a territory of more than a few square blocks is not necessary because the demand for their products is so high. However, for less popular brands, a larger territory may be necessary to help ensure success. In order to determine exactly how large that territory needs to be, you need to take a look at the pertinent information provided you by the franchisor, and also conduct your own research.
A franchisee’s renewal rights are often the cause of the messiest conflict between themselves and the franchisor. This most often occurs when a franchisee is successful, as the franchisor often finds it to be in his or her best interest to reacquire that particular location and enjoy a larger portion of the profits. Be aware of this as you are drawing up your agreement with the franchisor. Plan to have a successful store, and make sure that you negotiate a contract that makes it very easy for you to renew when the old one is up.
- Opening Date
This one is most pertinent to master franchise, that is, a business entity that the franchise owner commissions to manage several franchise locations or perhaps all the locations within a territory. If the franchisor pushes for an opening date that is too early and you fail to deliver, you are likely to suffer the consequences financially. Also, if you are going to manage multiple franchise locations, it is probably in your best interest to stagger the opening dates so that there is about a year between each one; and while you are in the process of launching all your stores, you have to make sure that your territory is protected so that no one else can come in and open a franchise there in the meantime.
- Cross-Default Provision
Also pertaining to master franchises, this provision allows the franchisor to default on all of a franchisee’s locations when only one of them fails. This obviously sets a very high bar for you as 100% of your franchise locations must succeed, and the consequences for not being perfect are that you lose all the others too, regardless of how they may be doing.
Do you have any additional advice for franchisees looking to negotiate a contract with a franchisor? Please let us know in the comments! And take a look at this site to create a franchise agreement sample.