Franchise Agreement

You’ve found a great franchise company that fits your personality, goals, skills, and lifestyle. You’ve applied to become a franchisee, and you’ve attended Discovery Day. Does this sound like you? If so, you probably understand the basics of how to start a franchise; after all, you’re already part-way through the process! 

But what about the lengthy documents you’ve likely started to receive? From franchise disclosure documents to franchise agreements, it can be an overwhelming amount of paperwork to read—and understand. That’s where FranchiseOpportunities.com comes in.

If you’re here because you’ve been searching for, “What is a franchise agreement?,” or “What are the conditions of a franchise agreement?,” you’re in the right place. We’re answering these questions and more.

What Is a Franchise Agreement?

A franchise agreement is a legally binding document that lays out the terms and conditions of a franchise relationship between the franchisor (parent company) and the franchisee (the individual who is purchasing the rights to operate a franchise business). This is one of the last franchise process steps before it becomes official. 

Once signed, the franchise agreement provides the license that allows the franchisee to operate their business and buy, sell, or distribute products or services under the franchisor’s brand. Franchise agreements and their associated documents can be long and complex. As such, many franchisees seek the assistance of a franchise lawyer to ensure they fully understand the materials.

While the franchise agreement definition is fairly straightforward, there are a couple of important things to note.

What Is a Franchise Disclosure Document (FDD)? 

Franchise Disclosure Documents are designed to lay out all the information a potential franchisee may need to know, including a clear snapshot of the franchisor’s company and what the franchise agreement will include, so they may do their due diligence. Franchisees receive the franchise agreement after they have received the franchise disclosure document. The Federal Trade Commission (FTC) requires that FDDs include 23 key pieces of information, which means FDDs can be hundreds of pages long. 

How Does a Franchise Agreement Work?

As stated above, a franchise agreement is a legal document that lays out—in detail—roles and responsibilities for each party. What 3 things are typically included in a franchise agreement? According to the FTC, at a minimum, franchise agreements must include the following three pieces of information:

• Fees: This provides the franchisee with the dollar amount or fee that must be paid to use the franchisor’s trademarks. This can be an initial fee of at least $500 or it may be a continuing fee paid out over a set amount of time.
• Brand: This provides the franchisee with the rights to use trademarks, intellectual property (IP), and other key pieces of the franchisor’s brand.
• Marketing: This provides the franchisee with direction on how they may use the branding information to conduct their day-to-day operations.

These required pieces of information are often accompanied by additional franchise terms to provide more clarity on the business relationship. And therein lies the true importance of a franchise agreement. Along with the FDD, this contractual document lays out rights and responsibilities for both parties to ensure a successful relationship. We’ll talk more about these additional terms later in this article, but first let’s take a quick look at the different types of franchise agreements available.

What Are the Types of Franchise Agreements?

There are three main types of franchise agreements, depending upon how many units the franchisee will operate and what their responsibility level will be. These agreements are individual franchise agreements, area franchise agreements, and master franchise agreements. 

Individual Franchise Agreement

Wondering, “What is the most common type of franchise agreement?” It is an individual franchise agreement, which is sometimes called a single-unit agreement. An individual franchise agreement grants legal permission for franchisees to operate a single business unit. This could be a brick and mortar business like Dickey’s Barbecue Pit, a home-based business like Home Helpers Home Care, or an online business like System Centric—the sky's the limt! Individual franchise agreements are ideal for those just starting out with franchising or business ownership, but they can be a great fit for anyone looking to own and operate a single business.

Area Franchise Agreement

An area franchise agreement, also called a multi-unit franchise agreement, gives the franchisee the ability to operate multiple units. Many area franchise agreements provide a franchisee the rights to a specific geographic area, such as a portion of a city or multiple counties. Most franchisors require a certain amount of business experience in order to qualify for an area franchise agreement. Many franchise owners grow their individual franchise agreement, for example, into an area franchise agreement after a certain number of years. 

Master Franchise Agreement

Master franchise agreements grant significantly more rights and responsibilities to the franchisee than the other two types of agreements. Under a master agreement, franchisees are given the right to franchise to other franchisees within their set area. Essentially, they become the franchisor in the area. This means they assume responsibilities like training and support, but they also receive financial fees and royalties from their franchisors.

If you’re interested in an area or master franchise agreement, it’s recommended to discuss those possibilities with the franchisor.

What Is Included in a Franchise Agreement?

As we mentioned earlier, a franchise agreement must include information about fees, the brand, and marketing. However, for most franchise agreements, there are a number of other terms that are included. Here are the most common elements to expect:

• Initial Fees:This section lays out the required initial fees to purchase the franchise. Fees are typically at least $500, but may be as much as $20,000 or more. This information is available when searching online for franchises at FranchiseOpportunities.com.

• Training and Support:Most franchisors provide some initial training and support to assist franchisees in developing the skills needed to successfully operate their business. Some franchisors also provide ongoing training and support. Be sure to understand the kinds of development you’ll have access to as a franchisee.

• Duration:In this section, you’ll find detailed information about how long the franchise agreement will last, rights to enter into a new agreement, and any upgrade requirements. Typical franchise agreements last between five and 20 years, depending upon the franchisor. Toward the end of an agreement, the franchisor and franchisee will discuss the future, including renewing or terminating the relationship.

• Fees and Royalties:On top of initial fees, the franchise agreement will also include information about ongoing franchise fees, marketing fees, and royalties. While most of these fees are collected on a monthly basis, you should confirm this with your franchise agreement. Most franchise agreements will also lay out specific information on late fees and interest, should you fall behind on payments.

• Intellectual Property and Trademarks:Trademarks and IP are some of the most important elements of a franchise—especially for well-known franchises. In this section of the agreement, you’ll find information on how you can use intellectual property and trademarks and how that information may be changed during the duration of your franchise agreement.

• Marketing:Some franchisors provide marketing and advertising, especially at launch time—but others do not. This section of the franchise agreement will lay out what the franchisor will provide to assist with marketing and what, if any, marketing fees are required of the franchisee.

• Geographic Territory:Many franchise agreements provide franchisees an exclusive or or protected territory. This may guarantee, for example, that another franchisee cannot operate within a radius of 25 or 50 miles. Ecommerce franchises and other companies that operate via the internet may not include a protected territory. 

• Site Selection:For brick and mortar franchises locations, it is typically the responsibility of the franchisee to select, secure, and develop a site. However, the franchisor is generally responsible for approving the location and ensuring it meets brand standards, including things like design or accessibility.

• Ongoing Site Maintenance: Some franchise agreements may include a section on ongoing maintenance that requires franchisors to maintain or upgrade their location or equipment on a set schedule.

• Insurance:This section will lay out what the minimum insurance requirements that franchisees must acquire prior to launch.

• Record Keeping and Audits:Some franchisors may require franchisees to maintain records using specific software or other products. This section of the agreement will define what these requirements are and what access franchisors have to records.

• Termination:This section lays out what, if any, conditions there are to terminate the franchise agreement early. Typically, these rights are on the part of the franchisor and the reasons are generally financial, including failing to pay ongoing fees or filing for bankruptcy. While no one enters into a franchise agreement with this in mind, it’s important to understand what your rights and obligations are in these circumstances.

• Non-Compete:Some franchise agreements contain non-compete clauses that would prevent a franchisee from operating a business in direct competition with the franchise. Sometimes, these non-compete clauses also include provisions that would prevent you from operating a competing business for a certain amount of years after your agreement has ended, too.

• Performance Standards:Many franchise agreements include information about minimum performance standards that must be met by the franchisor. These standards may include meeting a certain gross sales level, hitting a certain profit margin, or servicing a set number of customers.

What Should I Look for in a Franchise Agreement?

The above list may sound like a lot, which is why many franchisees choose to work with a franchise lawyer to ensure they fully understand the contract. Whether you choose to work with an attorney or not, here are a few things to look for when reviewing your agreement.

• What information is included in the franchise agreement? If you were verbally promised training, for example, that information needs to be included in the franchise agreement.

• Are there any discrepancies between the franchise disclosure document and the franchise agreement? If so, you may wish to bring this up with the franchisor.

• Does everything look legal according to your state codes? The legal requirements to start a franchise and operate one vary from state to state. An experienced franchise attorney can help you ensure everything is in order. 

• Are there additional services you would like added? While most franchise agreements are not negotiable, some franchisors may be willing to provide additional field support for a certain number of days or provide you more time to get your business launched.

FranchiseOpportunities.Com: Your Source for Franchise Information

Whether you’re just starting to look at franchises or you’re ready to move forward with Discovery Day, the franchise disclosure document, and the franchise agreement, FranchiseOpportunites.com is here for you. Since 1999, we’ve been bringing the most exciting franchise opportunities around, helping potential franchise owners enjoy the experience of becoming their own boss! 

Ready to get started? Check out our 50 most popular franchises of the year and explore our resources to help you along the entire franchise journey.