A franchise agreement is the contract between a franchise owner and the parent company. Despite today’s broad range of franchise opportunities, the agreements that define them have certain, typical parts, in common.
What is a franchise agreement?
Before digging into the actual wording, let’s look at the bigger picture. First, it’s key to remember that franchise agreements are binding legal documents. Get the advice of an attorney, preferably one specializing in franchise law. That does not mean you should abdicate your responsibility to know what you are signing. Question anything you are unclear on and anything out of sync with verbal promises or other written documents.
[Read: Thinking of Buying a Franchise? Here are the Pros and Cons]
Go clear-eyed into the process. Remember that franchise agreements are drawn up by the franchisor, with the purpose of growing their business while protecting their brand and reputation. Franchising is about replicating success. These agreements are structured for consistency—not custom tailored for the individual franchisee. While the viability of your business is important to the parent company, protection of their brand and IP come first.
While the viability of your business is important to the parent company, protection of their brand and IP come first.
Preparing to sign a franchise agreement
According to The Balance, a franchisor willing to remake an agreement to the franchisee’s specifications might be cause for concern. What you are purchasing, when you buy a franchise, is the ability to take advantage of a known name and a tried-and-true system. A franchisor willing to change things up could be a sign of trouble.
The franchise agreement is just half of a pair of important documents. Franchisors must supply the potential franchisee with a Franchise Disclosure Document (FDD) 14 days prior to signing the agreement. A careful reading of the FDD is as important as scrutinizing the agreement itself and potentially more illuminating.
The 23 items on the FDD are spelled out in FTC regulations and they include things you might struggle to find elsewhere, including:
- The franchisor’s business background, ethics and any past bankruptcies.
- Fees and financial arrangements.
- Any restrictions on how the franchisee can source products and services, or what they are allowed to sell.
- A list of current and past franchisees. SCORE recommends contacting as many of these as possible to get a read on their level of satisfaction with the parent company.
- Financial statements of the franchisor, copies of any contracts used in the offering and a copy of the franchise agreement itself.
Parts of the franchise agreement
All of that said, the franchise agreement is the one you will sign and, though it may be long and complex, it can typically be broken down into the usual suspects:
- Who: The agreement should indicate the parties to the contract. Cross-referencing the listed information with that provided on the FDD is a perfect illustration of how these two documents work in tandem.
- What: The agreement should include a detailed description of the business operation and any relevant metrics. Requirements set by the franchisor—including how the property is to be maintained, how much insurance must be carried, how records must be kept, what hours the business must be open should all be detailed. In short, the standards and best practices the franchisee must embrace to remain in the franchisor’s good graces.
- Where: The agreement should describe the exact boundaries of the franchise territory. If it is to be exclusive and protected, what form will that protection take, and what recourse does the franchisee have in the case of perceived infringement? If the franchisee is responsible for finding the specific site within the specified territory, the approval process should be delineated, along with any assistance to be provided by the franchisor.
- When: The agreement should state the duration of the contract and include information on resale or right of first refusal, should the franchisee wish to exit sooner.
- How much: There is the initial franchise fee, of course, which should be clearly stated, as should any additional charges. According to the Small Business Administration, additional costs such as marketing fees and royalties benefit both parties. Even so, they can add up, and therefore should be spelled out in the franchise agreement.
Note that it’s not all one-sided. The franchise agreement should also spell out the franchisor’s obligations, including a description and timetable for any training and support they will be providing, both pre-opening and ongoing. The marketing and advertising the franchisor will provide (a big reason to purchase a franchise) should be spelled out, along with any fees charged.
[Read: A Guide to Funding Your Business at Every Stage]
You’re anxious to get down to business. If you take the necessary time and hire the right legal help, you can protect your interests while staying ahead of the competition.
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