Things to avoid in a franchise agreement

The franchise agreement is the basis on which a franchisee-franchisor relationship is built. Any irregularities in this agreement can be potentially dangerous for both the parties. All business interaction will take place within the framework of this agreement. Also with changing market dynamics, the advantages will keep shifting. Hence it is very important to have a good franchise agreement in place, which has the ability to weather a few storms and also is acceptable to both. There are a million stories of franchises going down the drain just because of a weak or inadequate franchise agreement. So, we give you a list of things to avoid in the franchise agreement.

• Lack of Flexibility

It is important that the provisions in the agreement are flexible and acceptable to both the parties concerned. The agreement should not be one-sided and for this to happen neither the franchisee nor the franchisor should be too rigid. If the agreement is one-sided it will definitely lead to future litigation which is harmful for the business. Hence both the parties should be considerate and accommodating of each others views.

• Ambiguity over accountability

The agreement should not be ambiguous about various issues such as duties of the franchisor, duties of the franchisee etc. The rights and duties of both the parties should clearly be stated, in other words ‘’ who is supposed to do what’’. All the services to be provided by the franchisor and all the fees to be paid by the franchisee should also be clearly stated.

• Inadequate exclusivity clause

This has been one of the major sources of conflict between the franchisee and the franchisor. This is because a franchisor views a new franchisee as profit, while the existing franchisee views a new franchisee in his area as loss. The physical area over which a franchisee has exclusive rights should be well defined. Also the period for which the franchisee has the exclusivity shall be mentioned. The compensation in case of violation of this right should be well stated.

• Ambiguity over royalty and fees

Ambiguity over royalty and daily fees can often lead to conflict as the franchisee establishes himself in the market. Percentage of Commission as well royalty should be clearly stated.

• Lack of a conflict resolution mechanism

In today’s highly dynamic business world, conflicts are inevitable. In such a scenario, the lack, or the absence of a conflict resolution mechanism will definitely spell doom for the business. Hence a confliction resolution should definitely be a part of a good franchise agreement.