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Selling a Franchise & Fees: What Not to Miss in Your Franchise Agreement

The lengthy franchise disclosure document (FDD) is one of the most important aspects of franchise investment and each franchisee stepping into ownership can benefit their future plans by reading it carefully with legal support from individuals experienced with franchising.  Here are a few tips to consider when starting a new franchise to plan how your investment will work for you in the years ahead.

Consider your investment down the line: will you at any stage plan on selling your franchise to another party?  If the possibility could arise, then be sure to discuss in detail with your potential franchisor how sales are handled.  Some franchisors require that franchisees first offer to sell their franchise to the franchisor, giving them top priority as purchaser, and thereafter offering it to other potential buyers should the franchisor opt out of purchasing.

This is an important aspect of the agreement affecting long term investment goals for franchisees who may be interested in selling their franchise to a friend, family member, or other existing franchisee.  Options surrounding the franchisor’s right of first refusal, meaning first right to refuse an offer to purchase, can be negotiated from the start before signing any agreements to best establish reasonable expectations concerning sale price or future ownership.

Next, consider royalties and fees: do you completely understand how your franchisor is going to assess such fees and each of the different types of fees?  Most franchisors charge fees based on percentages of overall revenue streams such as sales.  Is it clear to you what areas of revenue are considered sales and where percentages will be taken into consideration?  Additionally, are all defined terms for fees specific and do you understand what aspects of daily operation they pertain to?

By understanding how royalties and fees are applied franchisees can maximize their satisfaction and go in with eyes wide open from the start, asking any necessary questions up front should an area of the FDD appear unclear.  This is where legal support is invaluable and can support the process of creating a transparent experience when reading through agreement terms and conditions.  Additionally, consider whether other franchisees are offered the same royalty and fee rates.  Discuss how the franchisor handles such fees across the board between various franchise partners and how any potential difference in rates is reconciled.

Both how the franchise agreement will affect your desire to sell a franchise into the future and the ongoing fees given back to the franchisor along the way are important areas to deeply delve into with professional legal support.  Understanding key terminology within the FDD and asking plenty of questions when speaking with the franchisor help to ensure a satisfactory experience and a worthwhile investment decision.

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