Commonly Overlooked Red Flags in a Franchise Agreement
As a prospective Canadian franchisee, you've got a lot of decisions to make. Chief among these is which brand to go with, and that choice is a tough but incredibly important one. Even with the best product or service, if you become part of a weak or poorly run system, you'll have a much tougher time making your business a success. While you've probably already done the basic research, including online reviews and background digging, there is one area that often gets overlooked when it comes to evaluating a system's quality: the franchise agreement itself.
Naturally, your typical franchise agreement is going to be a bit lopsided as the franchisor needs to protect the system for everyone in it. However, there are some industry "norms" you can use to measure the lopsidedness. The more an agreement deviates from these norms, the more you should take note.
Disorganization and/or poor wording
A disorganized or poorly worded agreement signals the franchisor has not committed the time or money it should have to the agreement's creation. As promising as the brand may appear, seeing this in the franchise agreement could also indicate that the franchisor is too distracted.
What happens if a franchisee defaults should be included in a franchise agreement, but the consequences should be firm yet fair. If you are seeing terms such as no notice to cure a default or consequences that are very severe, the franchisor may be too insecure or strict.
Too many excessive payment provisions
Terms that call for over-the-top payments from franchisees for things like approval, training, transfer and support service fees may indicate the franchisor is more concerned about its bottom line than how its franchisees do. Similarly, terms that transfer all franchisee volume inventory and supplies payment benefits to the franchisor can signal a greedy franchisor.
No balance for consistency
Consistency across a franchise system is important for quality and overall success. However, the agreement needs to be balanced in this area. Provisions that allow a franchisee to deviate too easily or ones that are excessively controlling and give the franchisor too much power over daily operations aren't good signs.
Many areas of a franchise agreement can give you a picture of the franchisor that created them. If you are concerned about any provisions, you should discuss them with a franchise attorney before you sign.