What’s in a Franchise Agreement?

Posted on February 25, 2009 by Jeremy Myers

A franchise agreement is a contract between the franchisor and the franchisee describing the terms of the agreement between the two parties. Most franchise companies have standard agreements and very little, if anything, is negotiable. A franchise agreement is written to protect the franchisor so before you sign, make sure you understand what you are agreeing to do.


Under FTC rules, a franchisor is obligated to provide you with a copy of the franchise agreement 5 days before you sign. This may be in the form of a stand-alone document or as item #21 in the franchisor’s Franchise Disclosure Document. There is no standard format for a franchise agreement because the business models and the items covered can vary significantly from business to business.

The following are items you can expect to see detailed in a franchise agreement:

1. Assigned Territory - Many franchisors award the exclusive right to do business in a defined area. The contract should tell you the specifics of that award and how the territory is defined (by zip code, by number of households, etc.).
2. Term of Agreement - An agreement is made for a finite period of time, often 5 or 10 years. This term is usually renewable by the franchisee if all of the contract terms have been met.
3. Fees and Payments - The three most common fees will be the initial franchisee fee, the ongoing royalty payments and the mandatory marketing contribution fee. Other fees may include renewal fees or additional training fees.
4. Training and Support - This section will cover what the franchisor will provide to the franchisee in terms of initial and ongoing training, operations materials, start-up assistance and ongoing support.
5. Obligations of the Franchisee - Management of the business, opening requirements, licenses and permits, sources of suppliers, hiring and training of employees and many other items may be covered in the franchise agreement.
6. Trademark Usage - A franchisor will grant the temporary rights to the use of their proprietary trademarks to the franchisee in the operation of the business under conditions set forth in the agreement.
7. Advertising - The franchisor will list the types of approved marketing and promotional materials and what, if any, materials are provided to the franchisee. Details of the advertising cooperative and associated costs will be spelled out.
8. Accounting Procedures - The royalty paid to the franchisor is usually based on revenue, requiring detailed accounting records to be provided by the franchisee.
9. Default and Termination - This section will list reasons for termination of the franchisee by the franchisor and the obligations of each party.
10. Resale Rights - Provisions are made so that the franchisee can transfer or sell his assets to another party, usually pending franchisor approval.

Other items covered in the franchise agreement may include the total anticipated cost of the investment, insurance needed or offered, renovations and upgrades, remedies for disagreements, etc.

If the overall size of a franchise agreement seems daunting, remember that a franchisor has a need to protect and preserve the business in its entirety, hence the desire to franchise. If each franchisee were allowed to make changes to the look of the business, the product or service, or the any of its parts, it would no longer be a successful model replicated for maximum success.

Go over each and every provision carefully and be sure you understand why each item has been included and how it will affect you. If you decide to have an attorney look at the agreement, find one who is experienced with franchising as he or she will better understand your rights and obligations. Finally, never sign a contract that you don’t understand. A good franchisor will spend whatever time necessary helping you to become comfortable with the contract.

A FranChoice consultant can help you explore a number of franchise opportunities. You are invited to sign up for our free service HERE.



About FranChoice:
FranChoice is the leading network of franchise referral consultants in the United States. Since 2000, FranChoice has been providing a free service to those interested in franchise ownership. Our consultants guide prospective franchisees through all stages of the business ownership process, from franchise investigation to the final sale, matching each individual’s interests, talents and investment level with a strong franchise business.