Franchise Contract Terms: Everything You Need to Know
Franchise contract terms are important in your franchise agreement, it outlines the duties and responsibilities of both the franchisor and franchisee.4 min read
Franchise contract terms are the important details in your franchise agreement, a written contract that outlines the duties and responsibilities of both the franchisor and franchisee.
Understanding Common Franchise Contract Terms
It's important to understand the most common and important terms of your franchise agreement:
- Franchisor: Parent business that offers franchise agreements, so people can start and run their own business using the parent company's trademarks, processes, and products
- Franchisee: Person who buys the right to operate a business using the franchisor's name and products
- Franchise Disclosure Document: Also known as FDD, the Federal Trade Commission requires all franchisors to provide one to prospective franchisees
- Franchise Fee: Initial fee paid to the franchisor that starts the franchisee process. This can be a flat fee or vary based on geographic region, experience, territory size, etc.
- Initial Investment/Startup Costs: The amount of money that is required to open a franchise; will include the franchise fee and other expenses like equipment, real estate, business licenses, supplies, and working capital
- Royalty Fee: Fee to be paid to the franchisor on a regular basis; may be a flat fee or a percentage of sales, and perhaps a separate royalty fee to cover advertising costs
- In-House Financing: Offered by franchisor to help offset expenses of franchise startup
- Third-Party Financing: Financial assistance from any other source than the franchisor
- Agreement Term: Details the length of time of your franchise agreement, common timeframes are between five and 20 years
- Registration States: Check FTC website for which states require franchisors to register FDDs with a state agency prior to legally selling a franchise location in that particular state
- Conversion: When franchisors offer entrepreneurs the option to convert existing business into a franchise
- Master Franchise: Master franchisee is a sub-franchisor for a particular territory
- Company-owned Units: Locations owned by the franchisor instead of a franchisee
- Absentee Ownership: Allows a person to have a franchise without being actively involved in management and operation
- Area Developer: Agrees to open a particular number of franchises in a large territory by a specified date
Important Franchise Agreement Provisions
There is no boilerplate format for franchise agreements since the terms will differ based on franchise type and the industry. However, there are some key provisions you'll see in most franchise agreements:
- Training: Franchisors have their own training program for their franchisees and their staff, which may be onsite at the franchisee location, at the corporate headquarters, or a combination of both.
- Territory: What is the designated territory in which you have the right to open and operate a franchise? It will also spell out whether you have exclusivity rights or not.
- Duration: This will detail the franchise length and whether there is an option to renew it.
- Intellectual Property: This provision includes information related to trademarks, signage, and patents. This covers how the franchisee can legally use the franchisor's intellectual property.
- Advertising: This provision will detail how much money the franchisor and franchisees will commit to advertising and marketing.
- Reservation of Rights: Franchisors need to detail their rights within a franchisee's territory, including internet sales, alternative distribution options, and more.
- Site Selection: This provision talks about franchisees finding their sites and how they develop them, keeping in line with the franchisor's required standards.
- Insurance: Franchise agreements include a provision to detail what approved minimum insurance limits are acceptable, which need to be purchased prior to opening.
- Bookkeeping: Franchisor will discuss what records franchisees are required to maintain and what operating manual and software they are allowed to use. It will also talk about the right to audit information as necessary.
Negotiate Franchisee Agreements
There are some contract terms that should be negotiated by a potential franchisee. Ensure you protect your territory by pushing back for exclusive territory rights. Some franchisors will try to add lengthy non-compete clauses, which go against local legal precedent. This should be a red flag that you might not be working with a very sophisticated franchise business.
Make sure you negotiate for the right franchise duration and the right to renew your franchise at the end. The ideal situation is to have the right to renew perpetually. Try to negotiate out the agreement provision that grants the franchisor the right of first refusal and that any sale should be at fair market value versus at a depreciated value.
If a franchisor pushes for an aggressive opening date, push back for something more reasonable. If you're opening multiple locations, do not let the franchisor punish all your locations if one fails.
If you need help with franchise contract terms, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.