What Is a Franchise Agreement?
Don't underestimate the importance of your franchise agreement. This legally binding contract between you and your franchisor determines how you run your franchise, your obligations to the franchisor, and the franchisor's obligations to you.
There's no standard franchise agreement. Franchise agreements differ in style, content, and language. Their terms vary based on the methods of operation involved in their specific industry. Since franchisors and their lawyers write these documents,
the conditions of most agreements heavily favor the franchisor and their right to maintain control of your business.
You shouldn't have any surprises by the time you're ready to sign a franchise agreement. You're entitled to receive a copy of a sample agreement at least 5 days before you sign. No matter how confident you feel in your legal expertise,
you should have a franchise lawyer review your agreement to flag any questionable conditions and ensure you understand your obligations in the agreement.
What Should a Franchise Agreement Include?
A franchise agreement should include details related to franchise ownership, financial obligations, and business operations. Agreements vary widely in the degree of detail provided. The franchise agreement should also spell out any promises made to you by the franchisor.
Don't make assumptions regarding conditions that seem vague in a franchise agreement. You could increase your financial risk by misinterpreting important details.
What are Three Conditions of a Franchise Agreement?
The conditions included in franchise agreements typically fall into one of the following three categories:
- Conditions related to franchise ownership
- Overview of the relationship between parties
While a franchisor may have the same terms with each franchisee, your franchise agreement applies to the specific relationship between you and your franchisor as it related to your business.
By granting you franchise ownership, the agreement includes your rights to the franchisor's system of operation and use of its trademark, logo, and service marks, for a specified period.
- Length of franchise agreement
The franchise agreement includes the duration of its terms. If you choose to renew, a new franchise agreement, which may include different terms, will apply.
- Renewal, termination, and resale policies
Conditions related to renewal and termination policies control your ability to choose how long you continue with the franchise and what you'll pay if you leave before the franchise agreement expires. They also determine how much control the franchisor has in allowing you to renew or sell your franchise. Some franchisors retain the right of first refusal, which entitles them to buy back a franchise or match a third party offer so they can retain ownership.
- Conditions related to your financial obligations
- Initial and ongoing fees
The franchise agreement confirms the initial franchise fee. It also specifies the terms of ongoing franchise payments that you'll make to the franchisor for the duration of the agreement. These costs can include monthly royalty fees calculated as a percentage of total sales.
- Advertising Details regarding the franchisor's advertising commitment confirm the type of promotional assistance you'll receive. The advertising conditions also specify the amount you must contribute to a franchise advertising fund and any obligations you have for conducting your own promotion. Guidelines include your use of franchise logos, trademarks, and service marks.
- Conditions related to operation of your franchise
- Assigned territory
This provision designates the territory in which you're authorized to conduct franchise business. It also indicates whether you have exclusivity rights. If so, the franchisor is obligated to protect those rights.
- Franchise training
The promise of franchise training specifies the location and extent of training provided to you and your staff. These details also include conditions related to continued administrative and technical support.
- Business operations
Terms that specify requirements related to franchise offerings and quality control ensure that the franchise's goods and services remain consistent.
Can I Negotiate the Terms of a Franchise Agreement?
Most franchise agreements leave little room for negotiation. Typically, every franchisee signs the same franchise agreement. However, you may have some flexibility in terms related to your individual location. A franchise lawyer can advise you on questioning possibly negotiable conditions and requesting reasonable revisions.
However, if a franchisor seems too willing to make concessions in the franchise agreement, it may warrant concern. A franchisor willing to negotiate terms with you may also do so with other franchisees. The more variety a franchisor introduces into the system, the more difficult it is for franchisees to maintain uniform products and services, which are key to franchise success.
How Long Does a Franchise Agreement Last?
The length of a franchise agreement varies. Many agreements last five to 10 years, while terms of 10 to 20 years aren't uncommon. Your contract should last long enough for you to recoup your investment. While you may prefer a shorter term for your initial agreement, beware that the franchisor can change the terms of the franchise agreement when you renew.
How Do You Terminate a Franchise Agreement?
The conditions for terminating franchise agreements typically favor the franchisor. In many franchise agreements, only the franchisor has authority to initiate termination. While reasons for franchisee termination vary, you may be able to use the following circumstances to initiate termination:
- Cancel the franchise agreement within the cooling-off period.
Like any contract, your franchise agreement includes a "cooling-off" period. This refers to the time during which you can decide to cancel the agreement without a loss. This varies by agreement, with the average between seven and 21 days after signature.
- Cancel because you haven't found a suitable site.
If you signed the agreement before you found a suitable site to operate your business, you can end the contract if you don't find an appropriate location within a specified period of time. If you end the contract under these conditions, you're entitled to a refund of any money you paid to the franchisor.
- Let the franchise agreement expire.
You may avoid financial penalties if you continue with your franchise until the franchise agreement expires. In this case, you may have to notify the franchisor in writing of your intention to refuse renewal by a specific date.
- Locate a buyer for your franchise.
If your franchise is successful but you're just not interested in continuing the business, you may benefit by selling your business. In this case, a franchise broker may help you find a prospective buyer. Beware that your franchise agreement likely includes a transfer fee, franchisor right to approve the new buyer, and other conditions that allow the franchisor to maintain control over the sale.
- Identify a violation of state franchise law.
If you believe your franchisor violated a specific state franchise law, you may have grounds to terminate the franchise agreement without penalties. This may apply if your franchisor has done any of the following:
- Failed to fulfill their obligations specified in the franchise agreement
- Misrepresented business details or profit expectations
- Misused the advertising fund
- Made unreasonable changes to the franchise agreement
- Failed to provide territory protection
- Participated in criminal actions or bankruptcy
A request for termination of a franchise agreement may require legal action. Some franchise agreements include an arbitration clause. This typically requires that both parties meet with an arbitrator before taking the case to court.
Signing a franchise agreement cements your relationship with a franchisor and gives you the green light to move ahead with your new venture. Understanding the terms of your contract can help ensure your success and satisfaction with this important decision.