Key Elements of a Franchise Agreement
If you’re exploring owning a franchise, one of the most important things that you can do is to carefully review the franchise agreement. This is a legal document that spells out exactly what you can expect from the franchisor—and what they’ll expect from you. While the details vary between brands, most agreements cover similar ground. Here are the main things you’ll likely see:
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Franchise Term and Renewal
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How long does your agreement last? The agreement will specify the term, your official opening date, and whether (and when) you can renew. If renewal is an option, it’ll also list the conditions that you’ll need to meet.
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Your Territory
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Will you have exclusive rights to your area, or can the franchisor open another location nearby? It should be set-out in your agreement how territories are defined—by population, a map, or sometimes not at all. Make sure you’re clear on the territory and whether it meets your expectation of competitive protection from other franchisees of the same brand.
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Fees and Payments
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Franchising costs go beyond the initial investment. Your agreement will break down royalties, advertising contributions, and other fees. Be especially careful of hidden costs and late payment penalties, as those can add up quickly.
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Training and Day-to-Day Operations
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The franchisor will outline their training for you and your staff, plus any ongoing support. Do you feel that it is enough? Most established franchisors offer significant training to ensure consistency in their brand – be aware of those who don’t. You’ll also see the rules for how the business must be run—everything from daily procedures to brand standards.
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Marketing and Advertising
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Most franchises require you to contribute to a marketing fund. In return, the franchisor usually provides brand-level advertising, tools, or campaigns that you can use locally.
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Build-Outs and Renovations
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If you’re opening a location, the agreement may include requirements for construction, renovations, or design updates. These will be at your cost, so make sure that it is all spelled out clearly. Some franchisors also tie renovations to renewal—so check whether you’ll be on the hook for upgrades down the road.
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Performance Targets
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Many brands set minimum sales or performance levels. Falling short might affect your renewal—or in some cases, lead to termination. Make sure these are crystal clear, and that other franchisors that you interview in your due diligence find these do-able.
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Insurance Coverage
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It’s your responsibility to carry the right insurance for your business. If you don’t, the franchisor may secure it on your behalf and pass the cost back to you.
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Using the Brand
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Franchisees are granted Intellectual Property Rights which are the right to use the franchisor’s logos, trademarks, and business system for the length of the agreement. The contract will explain exactly how these can (and can’t) be used.
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Protecting the Brand
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You’ll likely see an indemnification clause, which means that if your actions harm the brand, reputation or business, you’ll be responsible for covering the costs.
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When Things Go Wrong
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The franchisor has the right to terminate the agreement in certain situations, like poor performance or breaking the rules. Try to ensure that the agreement gives you the chance to fix the problem before termination.
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After the Agreement Ends
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When your term ends—or if the agreement is cut short—you’ll usually need to stop using the brand, return confidential materials, pay any remaining fees, and possibly follow a non-compete period.
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Unforeseen Emergencies
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If your business is damaged by fire, flood, or another disaster, the franchisor will have rules in place about next steps. Review these to be sure that they make sense for you.
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Death or Incapacity
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It’s not pleasant to think about, but agreements should also cover what happens if you can’t continue running the business. Some allow a spouse or family member to take over. Hopefully it won’t happen but make sure that this set out clearly to protect your business, the brand and your family.
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Final Word
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Franchise agreements are designed to protect the brand (not the franchisee) and ensure consistency across locations. Over the long-term, it’s also in a franchisor’s best interest to take care of the franchisee as well, but the contract isn’t written with that in mind.
The agreement is generally firm, but everything may not be set in stone. Some franchisors may open to negotiation on certain smaller points. If so, any changes should always be written into the contract.
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Most importantly, never sign without professional advice. A lawyer who specializes in franchising can review the contract with you, help you understand the fine print and make sure that you and your investment are protected. Legal counsel before signing could be one of the best investments you will ever make.
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