“The franchise agreement is important because it’s the heart and soul of

the business,” said Armando “Butz” Bartolome, president of GMB

Franchise Consultants.

Everything you need to know about managing your franchise and

maintaining a good relationship with your franchisor can be found in the
contract. Yet, most first-time franchisees take it lightly and often
misunderstand the document.

While franchise agreements contain standard provisions, terms will

differ depending on the nature of the franchise and the franchisor.
“Franchise agreements have gone through more than 20 years of
development to ensure that franchisors have the appropriate rights to do
their job within a framework of fair and reasonable treatment for
franchisees,” said Rudolf Kotik, founder of RK Franchise Consultancy.

And over the years, it has also gotten longer—ranging from 35 to over
100 pages—which can be a little intimidating, especially for first-time
franchisees. A thorough investigation of the franchisor should also have
been made. If not, it would be a lot harder to understand and appreciate
the terms.

“Franchisees should do their due diligence before entering into a

franchise agreement. They should look into all aspects of the franchise.
They should not be afraid to ask questions,” said Manuel Siggaoat Jr.,
managing director at Francorp Philippines.

Stumped? Here is a guide to some areas in the document that usually

raise a lot of questions.

1. Fees
Perhaps part of the reason why you became interested in investing in a
certain franchise is because of its low franchise fee. “A lot of franchise
buyers think everything is included in the franchise fee, but it’s not the
case,” said Kotik.

The franchise fee is the flat rate you pay to get the rights to franchise the
concept. It does not include the expenses you will incur while setting up
the whole business. So, while going through the franchise agreement, do
not just look at the franchise fee. Look at the total investment cost and
its inclusions, plus the other fees you have to pay after you have signed
the agreement, like royalty, advertising, and even the renewal fees.

2. Training
While the franchisor will train you and your employees, it is not entirely
free. “Some franchisees think they can get training any time for as many
people as they like. Only the initial training is free, repeat training has to
be paid,” said Kotik. Still, it has to be clearly stated in the franchise
agreement which training would be provided for free, and which training
would already be shouldered by the franchisee.

3. Operations
The operations manual, which is loaned to the franchisee over the course
of the contract term, is part of the franchise agreement. The manual,
which details how you would operate the business, is already made
known to you even prior to signing. Yet, while the franchise agreement
cannot be modified, “the franchisor can modify anything that has to do
with operations,” said Bartolome. So, it is best to keep abreast of the
operational changes and updates given by the franchisor, even though
they were not originally found in the franchise agreement. Failure to do
so might lead to a violation.

4. Products
Being a franchise, you are doing business “for yourself but not by
yourself,” said Bartolome. The moment you buy a franchise, there is an
understanding that you would be selling your franchisor’s authorized
products and services. Yet, “some franchisees think that they are
functioning as their own business,” he observed. Some franchisees also
“think that they can sell or offer whatever they want to offer,” noted
Kotik, and this is a violation of the franchise agreement.

5. Supply arrangements
Franchisees are usually required to buy products from the franchisor and
their approved suppliers, mainly to safeguard quality and get discounts.
“You have authorized suppliers because you are networking with them.
You are getting more leverage for credit, discounts, [and] support,”
noted Bartolome. Franchisors usually have a deal with suppliers that
allows you to return the goods if anything goes wrong—something you
cannot do if you get supplies from outside sources, like supermarkets.
However, remember that supplies still have to be priced fairly. “The
prices at which franchisees buy these items should be competitive with
sources outside the system, or should give the franchisee adequate
margins,” Siggaoat stressed. Remember that, unless otherwise stated,
you are not allowed to buy supplies from cheaper outside sources.

6. Territory
The franchise agreement should define your territory, which touches on
two other provisions: exclusivity, and right of first refusal, said Siggaoat.
If you are granted exclusivity, it means that no other store, whether it is
company-owned or franchised, will be allowed in your territory.

And under the right of first refusal, you would only be given the first
offer to invest in an expansion store in the territory. In the event you
refuse, the said expansion store could be developed by the franchisor or
offered to another franchisee, which could be bad for your business.
“This new store may cannibalize some of [your] sales and customers,”
reminded Siggaoat, so your rights and privileges with respect to territory
should also be clear to you before signing.

7. Renovation
Renovating your franchised outlet is not merely a friendly suggestion; it
is mandatory as per the franchise agreement. “Franchisors differ with the
timetable, but most [prescribe it] yearly, while others [require it] before
you renew,” said Bartolome.

Yet, franchisees should try to get an idea of the extent of renovation

required of them, said Siggaoat. Do you need to repaint and replace
worn-out fixtures, or do you redesign and install new equipment? Being
clear on the renovations needed not only spares you the added cost, but
also saves you from violating terms of the contract.

8. Renewal
Satisfied franchisees usually renew their contracts. Yet, what they fail to
realize is that there are also conditions for their renewal. “It’s not at the
whim of the franchisor to renew you, because there are certain
conditions [for renewal],” said Bartolome. Renovation of the franchised
outlet, for example, might be cited as a condition, said Siggaoat.
It should also be clear to the franchisee whether a renewal fee would be
charged. Francorp Philippines usually advises clients to waive renewal
fees. “There are very little costs associated with renewing an ongoing
franchise, unlike in the beginning where a franchisor incurs substantial
costs in evaluating, training, and marketing to a new franchisee,”
Siggaoat explained.

Franchisees tend to forget that they should express their desire to renew
well before the contract ends. In most cases, a 6-month notice is required
by the franchisor. Once you renew, you will sign a new franchise
agreement, which contains modifications made by the franchisor over
the course of your term, so you have to familiarize yourself with it all
over again—no two franchise agreements are the same.

9. Termination
The date when your franchise term will begin and end is specified in the
franchise agreement. But the franchisor can end the contract any time if
you fail the performance evaluation three times, said Bartolome.