In 2021, there was an estimated three quarters of a million franchises in the United States. If you are hoping to join these ranks and become a franchisee, you will need to sign a franchise agreement. These lengthy contracts govern the terms of your agreement and are crucial in your decision to move forward with a particular franchise. Before signing this document, you should take the time and effort necessary to understand what it means for your future.
What is a Franchise Agreement?
A franchise agreement is a legally binding contract between the franchisor and you, the franchisee. Franchise agreements vary significantly depending on the industry and franchise, but overall outline the policies that will define your relationship with the franchisor. The terms of your franchise agreement will govern how you run your business, any fees you pay, and your rights. These documents may be difficult to navigate if you are unfamiliar with them.
15 Elements Often Found in a Franchise Agreement
- Location/Territory. This section defines the geographical area in which you are allowed to operate. It should be specific about the boundaries and if you have exclusive rights to that area.
- Relationship. As a franchisee, you will not be an employee of the franchisor, but rather an independent contractor.
- Operations. The franchisor has expectations for your business operations. This may include detailed rules on the goods or services offered, pricing, hours of operation, store set-up, and quality standards.
- Training and Ongoing Support. Most franchisors train new franchisees to ensure a standard of operation and to help you succeed. The required trainings to begin operations and any continuous training policies will be often be found in the Franchise Agreement. The support offered by the franchisor will also often be specified.
- Duration. This section defines how long this agreement lasts. Look for the specific duration of time you are agreeing to, often 10 to 20 years. When nearing the end of your agreement, you may want to renew your franchise agreement and most agreements include a description of this process. You may also be required to take certain steps to officially separate from the franchise upon completion of the agreement.
- Schedule. This section defines the required schedule for opening business, including when you need to be operational. Late fees or termination of the agreement may be stated for any conflict with this timeline.
- Franchise Fee/Investment. All initial mandatory fees may be found in this section. This generally includes the upfront franchise fee to use franchise trademarks.
- Royalties/Ongoing Fees. Ongoing fees may be found here, including the royalties your will pay on your revenue. How often and how these royalties are calculated will be outlined.
- Trademark/Patent. This section will outline what rights the franchisor gives you to use the trademark, logo, and patents.
- Supplies. Most franchise require you to purchase specific products, services, or supplies and these will be laid out in your agreement. You may also be required to limit your suppliers to the approved vendors.
- Insurance. All necessary types of insurance required by the franchisor will be found in your agreement. Your franchisor will also have the minimum amount of your insurance policy.
- Termination and Transfer policies. In this section you may find your rights and obligations if the franchise agreement is terminated, including when you have the right to terminate the agreement. Should you wish to sell your business, the description of the transfer process is found in this section. The contract will usually also outline the process in the event of your death or incapacity.
- Personal Guarantee. Many franchise agreements require you to personally liable for the financing of the franchise. This means your personal assets may be used to pay costs and fees if your corporation does not.
- Noncompete clause. The contract may restrict the businesses you can work for during and after the terms of your franchise agreement. However, certain states and areas restrict on these clauses, making them unenforceable.
- Breaches. Your contract will define a breach of contract and the associated rights you or the franchisor will have such situations.
Getting Help with Your Franchise Agreement
If you have questions about your franchise agreement and how to ensure you understand your terms, contact our experienced attorneys at Sumsion Business Law. We can help you make an informed decision for your business and help you move forward with confidence.
