A franchise agreement is the contract between a franchisor and franchisee outlining the terms of their business relationship and what is expected from each party. It provides the standards that a franchisee must follow in order to protect the franchise’s operating system and brand as a whole.
When a franchise agreement expires, franchisees will have the option to renew so long as they pay the renewal fee, are in good standing with the franchise, and are willing to adhere to any new requirements (updated equipment, additional training, change in royalties, etc.). Franchisees that choose not to renew their agreement will be held to a non-compete clause and will lose the right to use the franchise’s name, brand, and operating system.
As with most legal documents, franchise agreements can be tedious to read through, but it’s important that both parties examine and understand the entirety of the contract. Potential franchisees should consider hiring a franchise attorney to look over the document as well.
Typically, franchise agreements are not negotiable. This is especially the case with well-known franchises since they have already established a system proven to work and won’t have any problems attracting franchisees. While each franchise agreement will vary in its exact language, they will all include the same basic elements.
What Information is Included in a Franchise Agreement?
- Fees – The agreement will explain the franchise fee, ongoing royalty fees, and additional costs. It will also include a schedule of late fees if the franchisee is past due on payments.
- Territory Granted – This section details how your territory is determined and whether or not it is exclusive. It will make it clear if a franchisor reserves the right to open other locations near your franchise if it wants.
- Training & Operations – While all franchises provide some type of training, the specifics will depend on each franchise’s operating system. The agreement will outline the restrictions and requirements for operating the franchise as well as what type of training franchisees will receive.
- Support Requirements – The agreement will also explain what kind of ongoing support franchisees can expect from their franchisor.
- Advertising & Marketing – Franchisees will have obligations to put a certain amount of money towards advertising and marketing, and the franchisor will often support these efforts as well.
- Design & Renovation – In order to maintain brand consistency, the franchise might require franchisees to renovate their location either before they open their franchise or as a condition for renewal. A specific supplier might be designated as well.
- Performance Requirements – A franchise might indicate a minimum performance requirement within a certain time frame. If so, the consequences of non-achievement will also be included.
- Insurance Requirements – Franchisees must obtain and maintain insurance coverage in order to operate their franchise business.
- Indemnification – The agreement will likely include an indemnification clause, which protects the franchisor from claims or damages that arise from the franchisee’s activities. A franchisee would also be responsible to pay the franchisor for any actions that damage the brand.
- Term Length – This refers to the franchise location’s opening date and how long the franchise relationship will continue before being up for renewal.
- Specifications for Renewal – The agreement will specify how a franchisee can renew the agreement when it expires.
- Conditions for Termination – If a franchise agreement is terminated, the reasons shouldn’t be a surprise. From the start, the agreement will clearly indicate what situations would lead to termination.
- Resale Terms – The agreement will dictate the franchise’s resale policy whether that’s allowing the franchisee to sell their business or including a buy back process.
- Post Termination Requirements – There are a few steps a franchisee will need to complete if their agreement comes to end. These include returning confidential materials, ceasing use of the brand, and taking care of outstanding fees. This section of the agreement might also include a non-compete clause. For further reading: Things to Consider Before Terminating a Franchise Agreement
- Contingencies in the Event of Death or Incapacity – No one wants to prepare for this situation, but all business owners should plan for the unexpected. This part of the agreement will designate who would take over the business should the franchisee suddenly pass away.
Things to Consider Before Signing a Franchise Agreement
Signing a franchise agreement is exciting, but it can also be a daunting prospect. It’s important to take every precaution and begin to prepare yourself before you officially sign the contract.
Here are four tips to help equip you in this process:
- Assess your fit – You want to make sure your goals coincide with the franchise’s business structure. On a practical level, you should also evaluate your personal skill set to ensure you have the ability to lead a successful business in the industry you choose.
- Speak with existing franchisees – You can gain valuable insights from other franchisees currently running a successful business. They will give you a fuller understanding of the franchise and how your vision and abilities will fit in.
- Understand your relationship to the top – You can avoid awkward situations with the franchisor if you understand all expectations from the beginning. This requires knowing the intricacies of the franchise agreement in order to ascertain how the franchisor-franchisee relationship will practically play out. Understanding these elements before signing will help set you up for success.
- Work with a franchise attorney – An experienced franchise attorney will review the agreement and have the expertise to address issues and concerns. The attorney will work with you to create the best possible scenario as you seek to become a franchise owner.
Need Help Working Through a Franchise Agreement?
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