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10 Must-Ask Questions About Franchise Agreements

Franchise agreements are legal contracts that bind franchisors to franchisees. Understanding their contents is of paramount importance to any and every franchise sale.

By Madeline LenaStaff Writer
Updated 12:12PM 10/30/18

While much of the focus is placed on Franchise Disclosure Documents (FDD) over the course of a franchise sale, the franchise agreement is the document that lives beyond the initial signing. It is a binding contract that will be referred back to if any discrepancy or issue were to arise in the future, so it is imperative franchisees have a comprehensive understanding of the document before signing on the dotted line.

In order to make sure prospective franchisees are equipped to ask the right questions when reviewing a franchise agreement, 1851 consulted the expert opinions of franchise attorney Tom Spadea and seasoned franchisee and FranNet broker Stacy Swift to determine the top 10 must-ask questions about franchise agreements.

How does the franchisor describe the franchisor/franchisee relationship?

Swift has spent the last 22 years with FranNet and was a franchisee with Fantastic Sams and Mr. Handyman before that. “To me, a franchise should feel like a family, with everyone working toward the same common goal of success,” she said. “A franchisor’s response to that question will tell you a lot.”

What is the extent of the support the franchisor provides?

“Franchisees need to have a strong grasp of what their role is and what the franchisor’s role is,” Swift said. “Franchise systems provide the model and blueprint to follow, but it’s up to franchisees to execute.”

“Understanding the systems that will be at work and the support you will receive from the brand is crucial,” she noted. Swift recommended validating the model with existing franchisees in the system. “Ask how closely they follow the model, if it works, what marketing and training support they're getting and what they are getting out of it.”

Do I have a strong comprehension all of the potential future fees I may encounter?

“Understanding all the fees and potential fees that the franchisor may charge in the future is really important for franchisees,” Spadea said.  

Swift agreed, saying,  “The FDD gives franchisees an initial investment range broken down into categories, but the amount of working capital they actually need may differ. “It’s helpful to dig a little deeper and verify numbers and break-even points with existing franchisees. “Err on side of caution and always have a cushion,” Swift said.

What type of exclusions is the franchisor carving out for themselves?

“No territories are absolute and it's important for a franchisee to know what could happen in the future,” Spadea said. Inquiring about the different sorts of exclusions that exist in regard to territory gives franchisees a better idea of what to expect as their franchise grows. “This doesn't mean they shouldn't do the deal, they just need to know what they are getting into,” Spadea noted.

How seriously does the franchisor enforce brand standards?

“Prospective franchisees should want to know how tough the franchisor will be in maintaining brand standards,” Spadea said. “Franchisors that are really tough on brand standards typically indicate a better system and even though the franchisee is agreeing to that enforcement against themselves, their investment is in the brand. Strong brand standards are better indicators of success,” he added.

Are the franchisor’s short- and long-term plans explicitly laid out?

“Ask where the company’s strategic plan has the brand in three, five and 10 years,” Swift said.

“When a franchise’s development team can thoroughly explain the short- and long-term plans of the system without glossing over key provisions, the franchise agreement becomes an asset to both parties,” Spadea said. Without clear-cut goals and a detailed plan for how to achieve them, franchisors weaken the appeal of the investment to savvy franchisees.

Is the dispute resolution clause clear?

“Even though it is most likely not subject to change, clarity on the franchise agreement dispute resolution clause is really important,” Spadea said. “There are no right or wrong answers here, but the clauses themselves can give you clues into the fairness and strategy of the franchisor which is a very important consideration because the franchisee is the weaker party in the contract,” he explained.

Under what circumstances does the franchisor require a complete remodel?

Understanding what constitutes the need for a full remodel and how often it happens is pertinent information when reviewing a franchise agreement and ultimately selecting a franchise brand.

“Depending on when the franchisee is opening and wherein the logo/design lifecycle the franchisor is in, they may be faced with a full remodel pretty close to opening,” Spadea pointed out. “The franchisee should understand that mechanism in the agreement and negotiate reasonable limits in terms of dollars and time,” he suggested.

How realistic is the franchisor’s timeline for opening multiple units?

“If signing a multi-unit deal, franchisees should be wary of an overly aggressive opening schedule,” Spadea explained. “Unless the funding is already lined up, opening one store per year over a multi-year span isn’t always realistic,” he added. Spadea warned that the ramifications of not meeting a quick-turnaround opening schedule because the first unit wasn’t open long enough to secure funding could include defaulting under obligations and potentially forfeiting the deposit paid for those future stores.

Am I taking the proper steps to ensure I understand this document properly?

Franchisees must ask themselves if they have a comprehensive understanding of the entire franchise agreement before committing to a franchisor. “Get a franchise attorney to review any and every document before you sign,” Swift said, noting it can’t just be any old lawyer taking a look at the paperwork. “You need someone who specialized in this unique industry and knows how to read an FDD and more,” she added.

Spadea, a practicing franchise attorney, said that a qualified franchise attorney goes through the entire agreement with a franchisee so they aren't surprised by what they are committing to. “It’s in the franchisor’s best interest in the long run that a franchisee truly understands the agreement and the commitments they are making by joining the system,” Spaeda added.

“The most poignant piece of advice I can give is that no question is off limits,” Swift said. “Don’t be afraid to ask anything, within reason. This is a huge investment of your life savings, so don’t feel the need to refrain from tough or direct questions.”