Franchise Agreement Review: Red Flags to Check Before You Sign

A franchise agreement review is worth doing before you pay any fee or sign even a letter of intent. The agreement is almost always drafted by the franchisor, it runs for years, and it decides what you pay, where you can trade, what you must buy and what happens when the relationship ends. Many of the problems franchise owners face later trace back to clauses nobody questioned at signing. Below are the red flags to look for, clause by clause.

Ask for the complete set of documents first: the franchise agreement, any separate development or area agreement, the supply terms, and the operations manual. Manuals are often made binding by a single line in the agreement, so you are agreeing to them too.

Fees, royalties and the real cost of the deal

The upfront fee is the number everyone negotiates, but it is rarely the largest cost over the life of the agreement. Check each of these:

• Whether the upfront fee is refundable if the outlet never opens, for example because a site is not approved.
• How the royalty is calculated: on gross or net sales, whether taxes and discounts are included, and how often it is paid.
• A minimum royalty that is payable even in months when sales are low.
• Marketing fund contributions, and whether the franchisor must account for how the fund is spent.
• Technology, training, audit and renewal fees, and any clause allowing fees to be raised or new fees added during the term.
• Mandatory refits or renovations at your cost at set intervals.

Put all of these into your own financial model, with realistic sales for your location, before you decide. If the outlet only works on the franchisor's projected numbers, treat that as a warning.

Territory, term and renewal

An exclusive territory should be defined precisely, by a map or a list of areas, not by a phrase like "the local market". Check whether the franchisor can open its own outlets, appoint another franchisee nearby, or sell into your area online or through delivery channels. Watch for performance targets that let the franchisor shrink or withdraw your territory.

Compare the term with your payback period. If you are unlikely to recover your investment before the first term ends, renewal matters a great deal. Red flags include renewal at the franchisor's sole discretion, a renewal fee that is not fixed, a requirement to refit the outlet on renewal, and an obligation to sign whatever agreement the franchisor is using at that time.

Exit, termination and non-compete

• Termination rights that are one-sided: the franchisor can end the agreement for any breach, however minor, while you have no right to exit early.
• No cure period, or a very short one, before termination for a breach.
• No buy-back of stock, fit-out or equipment when the agreement ends.
• Restrictions on selling your franchise: franchisor approval, a right of first refusal, transfer fees and conditions on the buyer.
• A post-term non-compete that is long or wide enough to stop you working in the same sector at all.
• Personal guarantees from the owner in addition to the business entity signing.

Indian law treats restraints of trade with caution, and how far a post-term non-compete can be enforced depends on its wording and the facts. That is a question for your advocate, not something to assume either way.

Supply obligations and intellectual property

Many franchise systems require you to buy stock, packaging or equipment from the franchisor or approved vendors. That is normal for consistency, but check whether prices are capped or linked to market rates, whether there are minimum purchase quantities, and whether you can source elsewhere if the approved supplier cannot deliver. Mark-ups on supplies can quietly become a second royalty.

On intellectual property, confirm that the franchisor owns, or is properly licensed to use, the brand name and logo it is granting you. The trade mark registration status can be checked on the official trade marks search. Check who owns the customer data, social media accounts and phone numbers you build up at the outlet, and what happens to them on exit.

Dispute resolution and the fine print

Look at how disputes are settled and where. An arbitration clause with a seat in a distant city can make a modest claim too expensive to pursue. Check the governing law, any cap on the franchisor's liability, the indemnities you give, and whether the franchisor can assign the agreement to someone else without your consent.

Before signing, speak to two or three existing franchisees of the same brand, list every clause you would change, and put your requests to the franchisor in writing. A franchisor that will not discuss any terms is telling you something about the relationship ahead.

Beyond Basics gives independent advice to franchise owners in Bengaluru. We model the numbers, flag the commercial risks in the agreement and help you prepare your negotiation points. The legal review of the agreement is carried out with our partner advocates.

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