The Franchise Document

Some may argue that franchise companies are made or broken on the strength of their documents. Any franchise document that does not encourage an optimal franchisor-franchisee relationship will undermine franchising success. Hence, it is critical for franchisors to take care when putting together the franchise documents. Franchisees should obviously take as much care formulating their franchise applications and negotiating the terms in the documents drawn up by the franchisors.

In the Unites States, the terms of at least one franchise document are dictated by a party other than the franchisor or the franchisee. This is the Franchise Disclosure Document or FDD. The FDD entails a disclosure by any prospective franchisor about the earnings of his or her business, past and present, and the earnings forecast for the future. In addition, the FDD should indicate any aliases by which the prospective franchisor has ever gone as well as the details of any trademarks associated with him or her. It should also indicate any implication of the prospective franchisor and his or her directors in fraud charges or in bankruptcy filings. All the information contained in the FDD is designed to protect any franchisees from being taken advantage of by unscrupulous franchisors. The party that defines the terms of the FDD is the Federal Trade Commission. Hence its terms are sure to be objective.

 

The Template-Based Franchise Document

 

There are plenty of other documents relevant to the franchising relationship. Many of them can be drawn up and modified by franchisors who have access to business franchise templates. Drawing up a franchise document from a business franchise template ultimately costs less money than hiring professionals to assist you to do the same. The distinction between a document from one of these templates and one drawn up by a professional for a specific franchise company is that the latter caters more specifically to the needs of the franchise company.

That said, it is important to note that a prospective franchisor who has made the effort to research the franchising process in depth can modify a franchise document from one of these templates and come up with an end product that addresses his or her needs adequately. This makes it clear that some individuals are able to make franchising work for them, even though they have limited budgets and cannot afford to hire professionals to guide them through the entire process. At the end of the day, having these templates as a resource is cost effective, and it helps provide many prospective franchisors with much needed guidance.

Franchise Contracts

Franchisors’ relationships with their franchisees are framed by much paperwork. This paperwork includes franchise contracts, the most fundamental of the documents that undergird the franchisor-franchisee relationship. They are legally-binding documents that establish the terms by which the franchise will be operated and detail the franchisor’s and franchisee’s respective obligations.

 

The Contents of Franchise Contracts

 

Franchise contracts often comprise two key parts. The first part of the document is called the Purchase Agreement. The Purchase Agreement describes everything pertaining to the initial franchise transaction. This includes the franchise’s purchase price, and details about the inventory and other business equipment that the franchisee will receive. The nature of the inventory and business equipment will obviously depend on the type of business being franchised. Additional items that are likely to make their way into the Purchase Agreement include marketing support from the franchisor, help selecting the location of the franchise and the training that the franchisee will need to bring him or her up to speed on the operation of the franchise.

In addition to Purchase Agreements, franchise contracts also have Franchise Agreements. The Franchise Agreement is the part of the document that lays out the terms of the franchisor-franchisee relationship once the initial purchase transferring ownership rights has been concluded. It describes the respective obligations of the franchisor and the franchisee. Such obligations might include the regular services that the franchisor will extend to the franchisee or the expectation that the franchisee will maintain a certain standard of cleanliness and carry certain forms of insurance. The Franchise Agreement also describes the rights that the franchisor is extending to the franchisee, including copyrights, trademarks, and trade secrets. An absolutely crucial piece of information that every franchisor will want to include in the Franchise Agreement is money-related information: everything to do with the fees and royalties that the franchisee will pay on a regular basis once the franchise is up and running.

Franchise contracts are put together by franchisors with the help of franchise lawyers. The onus is upon the franchisors to determine the shape that the franchises will take. Thus, the documents often favor them by default. The role of the franchise lawyers is to ensure that the franchise contracts address every relevant aspect of franchising and are legally binding. Potential franchisees can challenge some of the terms presented in the franchise contracts before signing them. In this way, they can ensure that the terms and conditions given in the contracts are more favorable to them.

What Goes into a Franchise Application?

Many factors go into making franchise success possible. Among them is the selection of the right franchisees. The franchise application plays an important role in helping you identify those franchisees who will be a good fit for your franchising endeavor.

Designing a detailed and thorough franchise application is one way to ensure that you learn as much as you need to know about your prospective franchisees. If your application form asks all the right questions, you will be able to figure out which individuals are likely to contribute the most to the success and growth of the franchise. The most basic sections to include in your franchise applications are explored in some detail below.

 

The Features of a Good Franchise Application

 

First and foremost on the form should be a section for the applicant’s personal information. You should be clear about the types of information you are requesting and the level of detail you want to see. Contact information, biographical data, and information that will give you an indication of the applicant’s character are all crucial parts of this section. It is also important to get the applicant’s educational background, including all training relevant to the franchise in question. Along the same lines, the applicant’s employment history is also relevant. Descriptions of jobs held, their locations, and the earnings associated with them should be provided.

The franchise application must have a section dedicated to the applicant’s personal financial history. Such information should include the applicant’s current source of income, the income amount, any assets or liabilities, and the applicant’s net worth. If the applicant owns a business and has ever participated in some form of litigation or arbitration, this must be indicated. If the applicant is married, information should be requested about the spouse’s personal financial history. If the applicant happens to have partners or financial backers, then their financial information should be requested too. This section is crucial because it is the one that indicates to the franchisor that a particular applicant has the wherewithal to handle the responsibilities that come with running a franchise in good times and bad.

A wise franchisor will include in the franchise application a section in which the applicant is invited to describe what he or she knows about the franchise opportunity and why he or she wants to become a franchisee. This section is important because it gives the franchisor some insight into the applicant’s personality and shows whether the applicant has a realistic picture of what franchising will entail. Another important section that must be included in franchise applications is one requesting applicants’ preferred territories and their willingness to consider other alternatives.

Should You Expand Franchise Opportunities?

Now that you are a franchisor, are you content with the gradual pace of growth of your franchise company, or would you like to expand franchise opportunities more rapidly? The answer to this question is likely to depend on your vision for the franchise company as well as on the financial health of the franchise company and the individual franchises.

Turning your business into a franchise is like jumping over a huge hurdle. It is hard to achieve, but once you do achieve it, the going can be comparatively smooth. Some businesspersons are content to let their franchise companies grow at a slow, organic pace once they have jumped over this first hurdle and achieved a certain size. Others are more ambitious and want to expand franchise opportunities aggressively by bringing new franchisees on board and spreading to territories further afield. Which of these models is the better one to follow?

 

What Options Exist to Expand Franchise Opportunities?

 

It is worth pointing out that running a franchise company is not quite the same as running a small business. One obvious difference between the two situations is that of scale: any gambles made when running a small business are bound to be smaller and to have fewer, more containable consequences. With a franchise company, risky decisions are not only likely to affect a larger number of people, but they are also bound to have more numerous and more complicated consequences. Thus, any discussion of whether to expand franchise opportunities must be sober and well-thought out. Accelerated growth can have negative consequences for a franchise company. It can result in great losses for the new franchisees, and this can ultimately have negative repercussions for the brand name. Hence, it is better to act prudently and make decisions that are backed by the facts on the ground.

There is an appropriate growth rate for every given franchise company. It is important to determine what yours is. If the existent franchises are not doing too well, it might be an indication that the goods or services offered are not competitive. It might also indicate that the franchise territories as they exist are too small. These are situations that call for changes other than expansion.

Trying to expand franchise opportunities internationally is another possible consideration. This can be a wonderful opportunity for growth, especially since overseas markets are bound to be underexploited. However, if you take this path, you will have to contend with franchise regulations in other nations and logistical problems like supplying products and training to overseas franchisees.