Franchise agreements can feel intimidating. They’re long legal documents full of technical jargon that can make your head spin. On top of that, the language can seem stilted to protect the franchisor while leaving you out in the cold. But in practice, these agreements aren’t nearly as intimidating as they may seem.
As someone who has looked at thousands of these agreements and has walked hundreds of candidates through this process, I wanted to provide a clear, no-frills breakdown of the most important elements of the franchise agreement. Because at its core, a franchise agreement is a license agreement between you and the franchisor.
Below, I break down several essential elements of the franchise agreement so you can approach the discovery process with a clear understanding of what the final franchise agreement will entail.
Basics and overview
Off the bat, you’ll notice a franchise agreement starts with the basics: the parties (you and the franchisor) as well as a brief overview of the brand/concept that you will be running. By the time you are considering signing a franchise agreement, this section will be well-covered ground.
Financial requirements
In this section, there are three key categories: the initial franchise fee, the ongoing royalties and marketing fees, and additional costs. The initial franchise fee is a one-time upfront lump sum that gives you the rights to use the brand itself. The ongoing royalties and marketing fees are the fees that are associated with the daily profits and running of your business. Both the initial franchise fee and the royalties/marketing fees are expected across all franchises. That said, not all franchises are created equal so it’s important to closely review what these fees entail to ensure they are supporting your business appropriately.
Lastly, you’ve got additional costs. As vague as this sounds, it’s really more dependent on the type of business you are running. For example, if you are opening a boutique fitness brand, then additional costs might include build-out items like treadmills, bikes, pilates machines, etc. These are costs that wouldn’t be necessary, for example, in a service brand that doesn’t have customer-facing real estate (think home services).
Territories
Depending on the type of franchise you are running, you will likely have exclusive or non-exclusive territory rights. Essentially, this determines whether competing franchises under the same brand can operate within your market. “Exclusive” territories mean that you and other franchisees under the same brand cannot market to customers of a territory owned by another franchisee for a service-based brand. For location-based brands, once your lease is signed, you will typically have a radius of protection around your location where no other franchisee can open a storefront–often these are a 2-mile radius but depend on the concept and projected density. Alternatively, “non-exclusive” territories allow for multiple franchise locations within a single market.
Training and ongoing franchise support
One of the things that makes franchising so attractive is the fact that you aren’t starting from square one. This is particularly apparent with training and franchise support.
From the onset, you’ll have a certain level of initial training from the franchisor. While this varies somewhat by brand and business model, you can expect the franchise agreement to outline a standard training that helps to prepare you to run your business. This often covers daily operating standards, marketing and sales practices, business administration norms, staff management and a familiarization with operation manuals/practices.
Furthermore, your franchise will likely offer ongoing franchise support, which consists of continuing support in these areas as well as access to a franchisee network of fellow owners who are in the same brand ecosystem. Shared best practices among franchise owners is one of your strongest areas of support.
Operational standards and rules
At the end of the day, there are standard operating procedures that you will be expected to follow as a franchise owner. Your adherence to these standards is essential not only to remain in compliance with your parent company, but to make sure you are working within the proven success system. This means following the operations manual, using approved vendors or ensuring specific products or services are available to your customers, as well as maintaining minimum performance standards. The franchise agreement will outline these requirements in detail to ensure that there is no confusion as to what is expected.
Term of agreement and renewal options
A franchise agreement will have a specified initial term limit, most commonly 10 years. However, there are also details about how to renew this agreement upon the completion of that term and what a renewal might entail. This could include a renewal fee as well as any updates or required remodels necessary to maintain the current franchise standards upon renewal (as an example, consider the old vs new branding/design of McDonald’s locations over the last decade).
Agreement termination or default
The franchise agreement will also outline what happens in the event that it is necessary to terminate the agreement. Under this section, you may see a “Cure Period,” which is essentially a period of time in which a franchisee has a certain window of time to fix a breach of contract (maybe to pay an unpaid royalty fee or fix some other mistake) before the franchisor can terminate the agreement.
Additionally, there will be details about what happens after the termination, including possible financial obligations, legal ramifications and non-compete clauses. While this should be taken very seriously, it’s important to discuss these terms with the franchisor to understand your obligations in practical terms.
Ultimately, this is a snapshot of several of the most important sections to understand about a franchise agreement, but it is certainly not an exhaustive list. It’s vital that you perform due diligence to understand these agreements before making any decisions. This is one of the reasons it’s a great idea to work with a consultant who can refer you to any legal or other professionals you may need to fully understand these documents.
This article was originally published on Entrepreneur.com
David Busker is the Founder of FranchiseVision and a senior consultant with FranChoice, the premier national network of franchise consultants. David helps candidates exploring franchise ownership to set their criteria and matches them with the perfect franchise, then supports and guides them through due diligence and franchise signing. You can learn more about David at FranchiseVision.
