Franchise Agreement Essentials

The franchise agreement is the legal contract between you and the franchisor, and it’s one of the most important documents you’ll ever sign as a franchisee. It sets the terms of your relationship, outlining everything from fees and obligations to the length of the agreement. Understanding the key elements of this contract is crucial before making it official. Here’s a clear breakdown of what to look out for in your franchise agreement.

One of the first things you’ll see in the agreement is the structure of fees and royalties. This typically includes the initial franchise fee, which is the upfront payment to the franchisor, and ongoing royalties, which are usually a percentage of your sales.

• Key questions to ask:
  • What is the initial franchise fee, and is it refundable?
  • How are royalties calculated, and are they based on gross or net sales?
  • o Are there any other fees, such as marketing or technology fees?

Your territory defines the geographic area where you’ll operate, and it’s crucial to understand if you’ll have any competition from other franchisees in your area.

• Things to clarify:
  • Do you have exclusive rights to a territory?
  • Can other franchisees or company-owned stores open nearby?
  • What happens if the franchisor decides to expand in your area?

The agreement should outline the support the franchisor will provide, such as training, marketing, and operational assistance. Knowing what support you can expect is key to your success.

• What to look for:
  • What initial and ongoing training will be provided?
  • Will you receive marketing support or access to advertising materials?
  • How will the franchisor help with site selection, equipment, or suppliers?

The franchisee’s responsibilities are also detailed in the agreement. This includes day-to-day operational guidelines, branding requirements, and adhering to the franchisor’s business model.

• Understand your obligations:
  • What operational standards must you follow (e.g., opening hours, customer service)?
  • Are there requirements for using approved suppliers or vendors?
  • How often will you be required to update or renovate your location?

Franchise agreements are typically for a set period of time, often ranging from 5 to 20 years. It’s important to know the length of the agreement and your options for renewal.

• Questions to ask:
  • How long is the initial agreement, and what happens at the end of the term?
  • Is renewal automatic, or do you need to meet certain conditions?
  • Are there renewal fees or new franchise terms upon renewal?

What happens if you want to exit the franchise, or if the franchisor decides to terminate the agreement? Knowing the termination and exit clauses is essential to avoid surprises.

• Things to check:
  • Under what circumstances can the franchisor terminate the agreement (e.g., failure to meet performance standards)?
  • What are your options if you want to sell the franchise?
  • Are there penalties for terminating the agreement early?

Many franchise agreements include non-compete clauses that restrict you from opening a competing business during or after your franchise term. Make sure you fully understand these limitations.

• Ask yourself:
  • Are there restrictions on the type of businesses I can run after the agreement ends?
  • How long do non-compete clauses last, and what geographic area do they cover?

If conflicts arise, the agreement will include a process for dispute resolution. This often involves mediation or arbitration before taking legal action.

• What to consider:
  • What steps must be taken if there’s a disagreement?
  • Is arbitration mandatory, or can you take legal action right away?
  • Who pays for legal fees in the case of a dispute?

Signing a franchise agreement is a big commitment, so it’s important to take the time to thoroughly review the contract and seek professional advice from a franchise attorney. By understanding the key elements—such as fees, obligations, territory rights, and renewal terms—you’ll be better prepared to make an informed decision. Before you sign on the dotted line, make sure you’re comfortable with every aspect of the agreement, ensuring it aligns with your business goals.