True, there are initial costs, such as the time for drafting the agreement as well as the fees to a qualified attorney.  However, such things can be huge lifesavers.  Just like with your personal health, prevention can be critical.

Actually, take Bill Gates as an example.  His father was a prominent business lawyer.  No doubt, Bill learned some valuable legal lessons, which helped him immensely when he had to negotiate with mega companies like IBM.  If he had been less diligent, there’s a chance he may have given away more advantages in his business dealings.

OK, let’s take a look at some of the reasons why you should have your contracts in writing:

1.  Minimize disputes:  Granted, even with a written contract, there is the possibility of a dispute.  But, the chances should be reduced.  All in all, the parties will have spent time thinking about the arrangement — which should make the responsibilities clearer.  Besides, if there is an enforceable written contract, it’s tougher for either party to weasel out of it.
2.  Professionalism:  Basically, a written agreement shows your seriousness about a business relationship.
3.  Protections:  There are a variety of ways to help protect your interests, such as with liability limitations, disclaimers, waivers, notices and termination clauses.
4.  Performance:  You want to get paid, right?  Or, if you are contracting for a service, you want to make sure you get what you bargained for.  Essentially, a written contract will help streamline the process of aligning the interests between the parties.

First of all, if a contract for the sale of goods is $500 or more, there must be a written contract (that is, if you want to invoke the UCC).  The main terms include:

1.  An statement that the parties have agreed to the sale of the goods.
2.  A statement of the quantity of goods being sold.

That’s it!

From there, the UCC essentially fills-in-the-blanks for other terms (such as on delivery, price, etc).  This is based on general rules-of-thumbs, business practices and customs.

Despite all this, it’s still a good idea to provide as much detail as possible when putting together a contract.  No doubt, there can be lots of room for disputes and rancor.

Interestingly enough, the UCC does not necessarily require a signature.  Example:  If a vendor sends you a confirmation of an order for new supplies and you do not object within ten days, then there is an acceptance.

However, because this may be unfair and misleading, various state laws have regulations on advertisements.  The general idea is that the merchant should have a reasonable stock of the product on hand or have a way to provide a rain check.

1.  Meeting of the minds:  Simply put, the parties to the agreement understand the transaction and intend to make a contract.

But, of course, things can get tricky.  For example, if the parties are engaging in negotiations, then there is likely no contract.  Rather, there should be some type of offer and acceptance.

Suppose that there is a counteroffer?  In this case, there is no contract unless there is an acceptance.

For example:  You offer to build a website for $5,000.  Jane, a prospective customer, says “I want you to do my website, but I want the price at $4,500.”

In this case, Jane is making a counteroffer.  And, if you accept, there is a contract.

What’s more, an offer will be terminated when the other party rejects the offer.  Or, the offer may end because there is a time limit on it.  If there isn’t one, then an offer is open for a reasonable amount of time (which can be dicey).

Finally, you can revoke an offer — so long as it is done before the other party accepts the offer. 

However, there is an exception:  an option.  This means that someone is paying you a certain amount to keep an offer open for a fixed period of time.

2.  Consideration:  The parties must exchange something for there to be a valid contract.  Typically, this means that someone provides a product or a service for payment.

3.  Writing:  Only certain types of contracts must be in writing.  Examples include:  agreements involving real estate and contracts that cannot be completed within a year.

He was not an overnight success story.  Rather, he had a knack for trying new things.  And, even when he hit on the right formula, he still realized he needed to continue the innovation.

For more on Smith, you can check out a piece I did here.

And, above all, make sure you have a qualified attorney look over things. It will be extremely helpful.

As for the franchise agreement, it is definitely possible to negotiate various terms.

Here’s a look:

Personal Liability: If you fail to make payments, will your personal assets be exposed? No doubt, this is a big deal. And, in light of the failure rates of franchises, it’s a good idea to try to limit your personal liability.

Fees: Try to negotiate all the fees, including the franchise fee, royalties, markups and advertising fees. What do you have to lose, right?

Minimums: A franchise may have minimum sales volumes. If you fail to meet them, you may lose your territory exclusivity or even your franchise.

In other words, make sure you are realistic about the minimums. Can you meet them? Or perhaps you should negotiate them down?

Sale: What if you fall ill and want to sell the franchise? Well, you may not have the right to do so.

Termination: A franchise organization may have the right to terminate a franchise for just about any reason. Obviously, this can be quite onerous. So, make sure you have some latitude, such as that termination can only be for “good cause.”

Noncompetition: This means that — if you leave the franchise — you are prohibited from entering the same business.

Ultimately, this could harm your ability to make money. As a result, try to limit the reach of the noncompetition clause, say to a geographic location (eg, a particular county) and time period (one to two years).

Like any disclosure document, the UFOC can be convoluted. But this is no excuse to not read it.

Here are some key areas to focus on in the UFOC:

Fees: Again, these can be hefty. So, try to get a conservative idea of what the overall fee structure will be for your business.

Backgrounds: This has the resumes of the officers of the franchise organization. Do they have a good background in the industry? Or, are the backgrounds spotty, such as including bankruptcies?

Litigation: This will disclose the pending lawsuits against the franchise organization. While it is common to have lawsuits, pay attention to any fines from the FTC.

Also, has any of the senior officers been convicted of felonies or had to pay fines?

Territory: Do you have an exclusive right for a certain area? If not, this can be a problem. After all, you do not want to compete against other franchisees.

Although, even if you have exclusivity protection, there may be some conditions. For example, you might have to maintain a certain level of sales volume.

Dispute resolution: Often, disputes are resolved via abrbitation. But, does the franchise organization require that the hearing be in a particular place — which is far away from where you live?

Financial Statements: You will find audited financial statements. How much cash does the company have? Is it losing money?

Outlet List: This shows the number of outlets as well as those in development. If there are only a few — or none at all — then be wary. The organization could easily fall apart.

Also, the list will have the contact information for each outlet. And yes, it’s a good idea to reach out to some of the operators. It can be a great learning experience.

Unfortunately, there are many.

So, let’s take a look at the kinds of fees you’ll be paying when you get a franchise:

Franchise Fee: This is the initial fee for having a franchise. While it covers things like support and training, it is usually a nice chunk of profit for the franchise organization.

Royalties: You are required to pay a percentage of gross revenues to the franchise organization. Given the slim margins on small business, a royalty fee can be significant.

Training: Even with the franchise fee, you still may have to pay a separate fee for training (even if you do not use the service).

Ad Fees: All franchises may have to pay an additional fee for new marketing programs.

Financing: If you borrowed money to get the franchise, you will need to pay ongoing interest fees (and probably financing fees).

Markups: You will likely be required to buy equipment, supplies and inventory from the franchise organization. As should be no surprise, there will be markups.

Note: As you can see, all of this can be overwhelming. So, it should be no surprise that many franchises have difficulties ultimately making money. Rather, the profits usually come when you have a chain of franchises.

Why?

First, there is a franchise fee. Basically, this is what you pay for the license for the franchise. Expect to pay anywhere from $10,000 to $50,000. Although, this fee will pay for the costs of training and site selection support.

Second, you will need to pay for legal help. The lawyer will review the documents and the franchise disclosure statement (called the Uniform Franchise Offering Circular or UFOC). Legal fees can range from $1,000 to $10,000. However, try to get your attorney to provide a ball-park figure.

Then, there will be the costs for building out the location. And, this can be hefty, say $50,000 to $100,000. Moreover, you’ll probably need to purchase inventory and equipment, which could add $20,000 to $100,000 as well.

Finally, you will need a certain amount of money in the bank to cover expected ongoing costs. This is known as working capital, which can vary from franchise to franchise.

Before getting a franchise, consider some of the following:

Fees: True, you will get the franchise brand and support. But the ongoing costs can be high, with annual fees ranging from 4% to 10% of gross sales. For small a business, this can make it difficult to achieve profitability.

Support: In the beginning, the franchise organization may promise support. But, what if it doesn’t happen? Unfortunately, you’ll probably have not much recourse in this situation.

Strict Rules: Franchises need to maintain quality (it’s imperative since customers want consistency). However, for an entrepreneur, this can be stifling.

Stability: In light of the recession, some franchise organizations have shown their weaknesses. What if there is not enough resources to continue innovating or marketing? What if the franchise goes bust?