What are the Key Subjects in the Franchise Agreement?

Understanding the Franchise Agreement

Like all contracts, a franchise agreement is a legally binding agreement between a franchisor-franchise business relationship that spells out, in understandable language how the new business will run and spell out exactly what the role of the franchisor will be. This agreement ensures the business will be operated in a manner that is identical to the way all the other franchises are being run and should address future potential bumps and blips down the road, like what happens if the franchisee defaults or the franchisor goes bankrupted.

There is no standard format that the agreement needs to adhere to because the terms and condition may vary from franchise to franchise. However, there are several items that all franchise agreements should address:

Training and Support

Generally every franchisor has their own training program for their franchisee's and their staff. Often this includes training done at the franchisee's location or at corporate headquarters. Franchisors also often offer ongoing support including administrative and technical support to you and the franchise's staff.

Assigned Territory

Most agreements will include what territory the franchise must be located and will designate as to whether or not you have exclusivity rights. Another words, exclusive rights means no other franchise should be able to operate in that territory.

Duration of the Franchise Agreement

This is self-explanatory in that the provision will state the length of the agreement.

Franchise fee and Total Anticipated Investment

Most agreements will have a requirement where the franchisee will pay an initial franchise fee that grants the right to use the franchisor's trademark and operation system.

Trademark, Patent and Signage Use

This covers how the franchisee can use the franchisor's trademark, patent and signage.

Royalties and Other Fees You Are Expected to Pay

Franchisors generally require a franchisee to pay an ongoing royalty, usually 4 to 8 percent of the total sales on a monthly basis.

This part of the agreement will spell out any percentage payments the franchisor will need to cover advertisements.

Operating Protocol

This part of the agreement goes into details on how the franchises run their outlets.

Renewal Rights and Franchise Termination/Cancellation Policies

This part of the agreement deals with how the franchise can be renewed or terminated. Sometimes franchisors will include arbitration clause included in the agreement, which means if there is any legal action on either party, an arbitrator will be called instead of going into court.

Resale Rights

There are some franchisors that will allow the franchisee to sell the franchise for whatever reason. Many have clauses for buy back or first refusal. This allows the franchisor to buy back the franchise at a rate determined by them or to match any potential buyers offer.