6 Legalese Terms Every Franchisee Should Understand

“Becoming a franchisee” isn’t always as easy as one might think. Of course, you must sign the franchise agreement and begin to work on your business, but what does that franchise agreement entail? As a new franchisee, you must ensure you fully understand what you’re signing up for and any contingencies that come along with the deal. 

Here are six crucial terms to understand:

1. Franchise agreement: The franchise agreement is the legal agreement between the franchisee and the franchisor. It is a legally binding contract that outlines the rights and obligations of both parties.

Understanding, on a foundational level, that this agreement is a legal one, positions the franchisee to interpret any included terms appropriately.

2. Force majeure: Force majeure is a French term that translates literally to “greater force.” It is used to refer to an event or circumstance that would be considered an act of God or something that neither party could reasonably be held accountable for.

According to Entrepreneur, “it identifies events the occurrence of which will temporarily excuse the otherwise timely performance of a party under the contract.”

3. Non-compete clause: The non-compete clause may be one of the most important parts of the franchise agreement to understand. Depending on the terms of the franchisor, this can dictate which sectors or businesses the franchisee is able to invest in moving forward. 

For example, a major coffee franchise may have a non-compete clause in its franchise agreement that prevents the franchisee from investing in any other coffee concepts moving forward.

Other iterations of non-compete clauses include the prohibition of operating a similar business within a given geographical area for a designated period of time or a requirement that any new investments the franchisee pursues obtain below a certain percentage of its revenue from a named service or product.

4. Forum selection: Forum selection refers to where litigation might be handled should the need arise. The franchisor typically chooses its local area as the “forum,” which can disadvantage the franchisee if they are not also local.

If litigation were to be necessary, the franchisee would need to provide transportation to the site, hire local counsel and likely accommodate the needs of any witnesses. Understanding this aspect of the agreement is important, especially if you’re interested in trying to negotiate this term before signing.

5. Indemnification: Indemnification is compensation for harm or loss. Typically, this is worked into franchise agreements to protect the franchisor, making the franchisee responsible for any losses as well as any associated costs like attorney’s fees.

“For instance, if a franchisee fails to clean up a spill which in turn causes a customer to injure herself, the injured party will often name not only the franchisee as a defendant in the lawsuit, but will also name the franchisor,” Entrepreneur says. “If the injured party wins a judgment against both defendants -- and given that the franchisor had nothing to do with the franchisee's day-to-day operations -- the franchisee will "indemnify" the franchisor by agreeing to pay all of its losses, including any damage award, attorney's fees and costs.”

6. Choice of law: This communicates which laws or locales will interpret the franchise agreement. Most often, the franchisor will choose the law of its own state, which, at times, can be a disadvantage to the franchisee. 

Depending on the laws of each party’s respective state, the franchisee may relinquish some legal protections that they would have in their own jurisdiction but are not codified in the franchisor’s area.