Navigating Franchise Agreements: Key Points to Consider

When investing in a franchise, the franchise agreement is one of the most critical documents you’ll encounter. It outlines the terms, responsibilities, and expectations between you and the franchisor, shaping the foundation of your business relationship. Understanding this agreement is essential to making informed decisions. Here’s what to look for when reviewing a franchise agreement.

One of the first sections of a franchise agreement outlines the fees you’ll need to pay. This typically includes an initial franchise fee, which grants you the right to operate under the franchise brand, and ongoing fees such as royalties and advertising contributions.

The initial fee can vary significantly depending on the franchise, while royalties are often a percentage of your gross sales. Advertising contributions usually go toward the franchisor’s national marketing efforts, but some brands may also require additional local marketing spend.

Make sure you understand the full financial commitment. Beyond the initial fee, confirm what percentage of your sales will go to royalties, and whether there are any minimums. Check whether advertising fees are fixed or variable, and clarify how these funds will be used.

The territory section outlines whether you’ll be granted an exclusive area in which to operate. An exclusive territory means the franchisor will not open additional franchises within a defined geographical area, helping protect you from internal competition.

However, not all franchises offer exclusivity, and some agreements may allow the franchisor to open new locations close by. This can significantly impact your business, especially in competitive or saturated markets.

Check whether the agreement offers exclusive territory rights or if there are conditions under which another franchise can open nearby. Understand how your territory is defined and any potential exceptions or limitations.

Franchise agreements typically come with strict operational guidelines to ensure brand consistency across all locations. These guidelines may cover everything from the hours of operation to the appearance of your store and the type of products or services you must offer.

While following a proven system is one of the benefits of franchising, it’s essential to understand the level of control the franchisor has over your daily operations.

Review the operational requirements carefully. Make sure you’re comfortable with the level of oversight and the specific standards you’ll need to meet. This could include mandatory training, software systems, or even the design and layout of your business.

Franchise agreements are usually valid for a set period, often between 5 and 20 years, after which you may have the option to renew. Renewal terms may come with additional fees or require you to meet certain performance benchmarks.

Understanding the length of your commitment and what’s required to renew your agreement is crucial for long-term planning.

Check the initial length of the agreement and whether you have the option to renew. Pay attention to any conditions or fees associated with renewal and make sure you understand what is expected of you as the franchisee.

The agreement will also outline conditions under which either party can terminate the franchise relationship. This could include breach of contract, failure to meet performance metrics, or failure to pay fees. Additionally, the agreement may specify what happens if you want to sell or transfer your franchise to another owner.

Make sure the terms around termination and transfer are clear. Understand the franchisor’s rights to terminate the agreement and what steps you’ll need to take if you decide to exit the franchise.

A franchise agreement is a legally binding document that defines your relationship with the franchisor. Before signing, it’s essential to understand the key elements—fees, territory rights, operational guidelines, contract length, and exit strategies. Consulting with a legal expert who specializes in franchise law can provide valuable insight and help ensure you’re making a sound investment decision. By carefully reviewing these critical areas, you can enter your franchise with confidence and clarity.