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The Franchise Operation and the Franchise Agreement are Interrelated.


Some franchise candidates make the mistake of paying too little attention to the franchise agreement and how it relates to the franchise operation. Here are several important areas to focus on.

When franchise candidates find a franchise that interests them and that franchise fits their financial, business and personal profile itís time for some serious due diligence. Unfortunately a number of franchise candidates fail to see the relationship between the franchise program and the franchise agreement. Iíve found there is a tendency on the part of many franchise candidates to focus the majority of their attention on the operation of the franchise rather than how the franchise agreement serves to establish the guidelines for operating the franchise.  

Here are examples of how the franchise operation and the franchise agreement are interrelated:

1. When the franchise consists of a unique product sold to a niche market that results in the possibility of limited demand the size of the territory, as defined in the franchise agreement, it should be a concern. If the size of the territory doesnít reflect this situation than the result could be poor sales. Yogurt anyone? In this case attempt to negotiate a larger territory.

2. If the franchisor has the right to market the same products or services through other marketing and distribution channels, such as supermarkets or the Internet, than a prospective franchisee should confirm that this will not pose a risk to his or her franchise. This provision can be found in a number of franchise agreements and should be a concern for a prospective franchisee.

3. The franchise agreement includes a sales quota or franchisee performance clause. Certain franchise agreements include a performance provision so that a franchisee doesnít tie up a territory with low sales. Iíve recommended this clause for franchisors that grant a large territory as a way to protect their market. As a franchisee you want to be sure that a momentary economic downturn or factors out of your control donít penalize you under a performance or sales quota provision.

4. The franchisor has approved vendors that the franchisee must purchase from. One of the benefits of a franchise is the ability to provide products, equipment and supplies through vendors at a cost and quality that the franchisee couldnít obtain on their own. However, there have been and continue to be instances whereby a franchisor obtains rebates and monetary benefits resulting from franchisee purchases. If a franchisee is required to purchase product ingredients from certain vendors than the franchisor should do all they can to keep these ingredient costs low. This could include passing up vendor rebates for lower costs or passing on any rebates to the franchisees.

These are a few examples of how the franchise operation and franchise agreement are bound together. To avoid getting involved in the wrong situation a prospective franchisee should always engage the services of a qualified franchise attorney. The attorney can evaluate the franchise agreement in order to identify potential problems and where able negotiate changes on behalf of the franchisee.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com


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