If you’re considering franchising your business, it’s critical to carefully assess various aspects of your franchise model. Every decision impacts the success of your franchise network and the satisfaction of your franchisees. Below, we outline five key questions to ask before drafting your franchise agreement. For guidance, it’s always a good idea to consult a franchise lawyer to help navigate these complexities.
1. Will I Offer Exclusive Territories?
One of the first questions to consider is whether you will offer your franchisees exclusive territories. This decision largely depends on your industry and the demand for your product or service. In industries like medical services or other specialist fields, offering exclusive territories is often expected. Franchisees in these industries generally want protection from internal competition.
However, in businesses like cafes or retail outlets, there is a trend away from granting exclusivity. High demand for such products and services may justify multiple franchisees operating within a similar region. Deciding whether to offer exclusivity should be driven by market demand and the nature of your business. A franchise lawyer can help you assess whether exclusivity makes sense for your model when you draft a franchise agreement.
2. What Fees Will I Charge?
Setting the right fees is crucial to ensuring both you and your franchisees thrive. Franchise fees typically include an upfront franchise fee, ongoing royalty fees, marketing levies, and additional operational costs. You’ll want to model these fees carefully to ensure that both parties win financially. The franchisee should be able to break even within a reasonable time frame, which, in a typical 7-year term, would generally mean breaking even by the 18-month mark.
If you overcharge, you risk having franchisees fail or struggle financially. However, if you undercharge, your business model may not be sustainable. Ensuring the financials are right for both parties is essential for long-term success. For a detailed breakdown of fees typically charged, refer to our prior article linked here, or consult a franchise lawyer when you draft your franchise agreement. Magnolia Legal are very experienced franchise lawyers who can provide feedback on your franchise model.
3. What Term Will I Offer?
Most franchise agreements are for terms of 5 or 7 years, with the option to renew for another 5 or 7 years. While these terms are common, there are no fixed rules. When deciding on the term, consider factors such as typical lease durations, industry standards, and what your competitors are offering.
It’s also vital to align the term of the franchise agreement with the financial model you’ve set for the franchisees. A longer term can provide stability, while shorter terms may offer flexibility for both you and your franchisees. Again, this is where seeking the advice of a franchise lawyer Sydney can be invaluable as you draft your franchise agreement.
4. What Involvement Will I Have in Setting Up the Business?
Another important factor is how involved you, as the franchisor, will be in helping franchisees set up their businesses. In recent years, there has been a shift towards “turnkey” franchises, where the franchisor manages everything. This can include fit-out, purchasing equipment, and even organising the launch event. Essentially, the franchisee just steps in and starts operating the business.
Turnkey franchises are attractive to new franchisees, as they reduce the stress and complexity of starting a business. However, they also come with additional costs and responsibilities for the franchisor. Whether you opt for a more hands-off approach or choose to offer a full-service turnkey model, it’s essential to outline these responsibilities clearly when you draft your franchise agreement.
5. What Termination Rights Will I Include?
Termination rights are another critical area to consider. Traditionally, franchise agreements run for a fixed term, and franchisees are not given the right to terminate unless there is a breach. However, an increasing number of franchise agreements now allow for franchisee termination in certain circumstances.
Before deciding to offer such a right, think carefully about the liabilities that could arise from third-party contracts or leases. If a franchisee terminates early, what will happen to these obligations? A well-drafted termination clause can offer protection for both you and the franchisee. Consulting with a franchise lawyer is highly recommended to ensure your franchise agreement strikes the right balance between flexibility and protection.
Final Thoughts
Franchising can be a great way to expand your business, but it’s important to approach the process thoughtfully. Each of the decisions outlined above will significantly impact your franchise model and the success of your franchisees. Before taking the next step, speak to an experienced franchise lawyer (like Magnolia Legal) to help you draft a franchise agreement that sets your business up for long-term success.