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Franchising Basics: What Is a Franchise Agreement?
A franchise agreement explains exactly what the franchisee and franchisor can expect from one another. In this article, expert franchisor Jesse Coslov offers advice on properly interpreting the document.
At its core, the franchise agreement is a contract between a franchisee and franchisor that benefits and protects both parties. Jesse Coslov, CEO and founder of The Dog Stop, explained the significance of this document, which serves as the foundation of a successful partnership between franchisors and franchisees.
"It's very important to understand your franchise agreement because it outlines and details exactly what your obligations are to us and the system," said Coslov.
Franchise Agreements Protect Franchisees and Franchisors
For the franchisor, the franchise agreement serves as a shield against baseless accusations. According to Coslov, “it helps protect the franchisor from a franchisee who decides to not follow the rules and then doesn't find success and tries to blame the franchisor.”
For the franchisee, the franchise agreement acts as a guarantee of support they are entitled to from the brand. “It’s obviously important to understand what benefits they're going to get, being part of the system,” said Coslov, “and what support, guidance and direction they can expect.”
Both parties mutually benefit from a well-written and well-understood franchise agreement. Unfortunately, this isn’t always the case.
Franchise Agreement Red Flags
While legal documents tend to be complex, Coslov believes an easy-to-understand franchise agreement is a good sign of a transparent and honest brand. "I personally believe that the agreement should be written in relatively plain English,” he said, “and you shouldn't need a lawyer to explain to you what everything means.”
Coslov urged caution if certain provisions or clauses seemed unfair or overly complicated as this could be an indicator of a franchisor’s hidden agenda or intentional ambiguity.
Another common concern (one that Coslov hopes is going out of fashion) is the inclusion of liquidated damages in franchise agreements. He explained how some franchisors retain this clause, allowing them to pursue the franchisee for additional payments even after the agreement's termination.
Enlist an Expert to Review Your Franchise Agreement
Although Coslov believes a franchise agreement should be transparent and easy to understand, he also believes in the necessity of having a franchise attorney review the agreement.
"You always want to have a franchise attorney review the agreement on your behalf," Coslov emphasized. “Otherwise, you're just going to end up wasting a whole bunch of time and money on comments and changes and requests that any franchise attorney would know are not going to be accepted or not things that can be adjusted.”
A franchise agreement, while a legal document, also acts as a road map to success. It lays out all obligations, protections and expectations of both the franchisee and the franchisor. Understanding this document, especially with the help of an attorney, can help ensure that both parties are on the same page and working towards building a thriving business together.
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