Dissecting Key Points In a Franchise Agreement

Becoming the proud owner of a franchise is an exciting venture that takes time and a whole lot of research. Once you’ve done your due diligence and read through the Franchise Disclosure Document (FDD), you’ll only have one thing left to review: the franchise agreement.  

Franchise agreements serve as legally binding contracts between you (the franchisee) and the franchisor. These documents typically vary from franchise to franchise but will explain in great detail everything that is required of you as a new franchise owner. Hiring an attorney to review this legal document is highly recommended.

“Have it examined by legal counsel with franchise experience,” wrote Kerry Pipes of Franchising.com. “You want to be informed before you sign a franchise agreement. Much like a marriage, you want this relationship to be long-lasting.”

While franchise agreements can be structured in a number of different ways, there are a few key points that you should be ready to familiarize yourself with.

Location and Territorial Rights

One important element of the franchise agreement that you will need to confirm is your location and territorial rights. This section of the contract will define the geographical boundaries of your business and specify the market area you can serve. This segment will also clarify whether your territory is exclusive or shared, and should outline the rules for potential expansion. According to Small Business Trends, this is vital when it comes time to planning your business strategies.

“Territories are important to limit market saturation. An individual franchise business will have a harder time competing in an over-saturated area. Remember your significant investment in the opportunity. How would you like it if you paid hundreds of thousands of dollars to open a franchised outlet, only to discover that the franchisor allowed another franchise just a quarter mile away?”

Operations

The operations-focused section of a franchise agreement will detail how franchisees are expected to run their franchises and can encompass a wide range of aspects: staffing requirements, inventory management, marketing strategies and customer service standards. This portion of the contract essentially acts as a guide to ensuring that you’re maintaining consistency and uniformity with the brand.

Duration

The duration clause specifies the length of time the franchisee is allowed to operate under the franchisor’s brand and utilize its business model. It outlines the initial term of the agreement, which could range from a few years to a couple of decades. This segment may also include provisions for renewal options after the initial term expires.  

Franchisor Support

The extent of the support and assistance you’ll receive from the franchisor is another important element to familiarize yourself with in the franchise agreement. The agreement will outline the nature of the assistance the franchisor is obligated to provide. It should include details about training, ongoing support, marketing initiatives and any additional guidance that may be offered to you as the franchisee.

Royalties and Fees

Although it’s vital to understand every aspect of the franchise agreement, the section concerning ongoing royalties and fees should be thoroughly analyzed as it directly affects your bottom line and profitability. Royalties will represent a percentage of your sales that you pay to the franchisor regularly. Understand the specifics, such as percentage and the frequency of payments. The agreement will also outline any advertising fees, technology fees or ongoing costs that you’ll be required to pay on a recurring basis.  

Review It Closely  

Dissecting the franchise agreement may be a meticulous task, but it’s an important step that all franchise owners have to undertake to safeguard their business interests and ensure a smooth operational journey. But as franchise attorney Tom Spadea noted, it’s not just up to a franchisee to understand the agreement. It’s also in the interest of the franchisors to make sure they’re making the document as clear-cut as possible.

“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,” Spadea told 1851 Franchise.

While we’ve listed some key elements of what you can expect from the franchise agreement, it’s highly recommended that you go through each line of this document with a fine-tooth comb to ensure you understand your rights and obligations as a franchise owner.