After reading the franchise disclosure document (FDD) and taking part in discovery day, you may be given an important document: a franchise agreement. Reviewing this franchise agreement is a must, but it's no simple task. Franchise agreements are complex, legally binding documents. They define your rights and the restrictions you must adhere to as a franchise owner. They also describe the role the franchisor will play as you operate your business.
What do I need to know before reviewing a franchise agreement?
Franchise agreements form a contract between the franchisor and a franchise unit owner. This contract assigns new owners the legal right to run a franchise unit under a precise set of terms and conditions.
For prospective franchise owners like you, this document is very important. Be sure to review it with an attorney to ensure you understand what you're agreeing to.
What am I agreeing to?
The agreement lays out the standards the franchisor has set for its franchise units. Those standards help them ensure that there's consistency across their franchise units. They're part of the business’s strategies for success.
Franchise agreements will vary by company. Still, many contain similar clauses and language. Here are some of the terms you can expect:
- Contract length. This document might state how long your agreement with the franchisor will stand. Often, the contract length equals the length of the lease on the property you plan to attain.
- Fees. The document should describe the upfront and ongoing fees you’ll pay to run a franchise unit. It may state how much will be owed every week, month, or quarter or explain how the fees will be calculated.
- Location requirements. Franchisors might specify certain requirements for any site you select for a franchise unit. They may also explain how to attain the franchisor’s approval for a site. And, if the franchisor offers site selection support, the agreement will cover the terms and limitations of that support.
- Training. Most franchise agreements spell out the training you'll need to complete. Many also explain the kinds of ongoing support that you'll receive throughout your franchise contract.
- Brand usage. Franchise agreements often include a guide for using and displaying the brand name on signs and packages.
- Operational procedures. These documents often state that owners must follow and keep confidential the operating manual and any revisions made to it. The agreement may also specify the products, materials, systems, and services you must use in daily operations.
- Quality standards. Franchise agreements may include precise practices that franchise unit owners must follow to “ensure uniformity and consistency in presentation and service” with other franchise units.
- Recordkeeping. Franchise agreements might explain the records that franchise unit owners must keep and share with the franchisor. Generally, these include weekly sales reports, monthly profit-and-loss statements, and audited financial statements.
- Insurance. Franchise agreements often spell out the insurance coverages their unit owners must attain to run a franchise unit. Many name the amounts of coverage necessary for worker’s compensation, general liability, product liability, bodily injury, property claims, and other forms of insurance.
- Taxes and liabilities. Franchisors may state that you'll need to pay your tax obligations and the fees required for the business permits, certifications, and licenses you need to run the business. Many will also say that the debts you incur as a franchise unit owner are your own.
- Arbitration. Franchise agreements lay out the process you and the franchisor will follow in a dispute. Often, franchisors request arbitration rather than litigation.
- Termination and default. Franchise agreements spell out how and when a franchisor may cancel a franchise agreement. They also name the recourses available to franchise unit owners.
What if I don’t agree with some of the terms?
Sometimes, agreements include terms you might see as overly forceful or restrictive. There is some legal precedent to counter these kinds of terms. Owners have successfully fought back against contracts that require them to make frequent, costly building updates or earn a fair living in a similar business after a franchise contract ends. If you find these kinds of terms when you're reviewing a franchise agreement, an attorney may be able to help you argue those points and find an outcome that’s fair for both parties.
Other terms can be tougher to negotiate. This tends to happen when you’re dealing with a well-established franchisor. Regardless, you should raise and document your concerns and ask for an alternative. Then, ensure that they put any promises or claims they make in response into writing. Your attorney can help you with this task.
Do I really need an attorney's help with reviewing a franchise agreement?
Yes. You'll need to understand every directive and restriction in the contract. This will help you avoid franchise penalties or contract termination. It's part of the due diligence process you’ll need to take on before signing your agreement.
Should an accountant spend time reviewing a franchise agreement, too?
It’s a great idea for an accountant to spend time reviewing a franchise agreement, too. Your accountant can explain how upfront and ongoing franchise fees will affect your operating income. That pro can also help you make sense of the expenses involved in owning and running a franchise unit and how much income you’ll need to generate to cover those ongoing costs.
These accounting firms are a few of our favorites:
Due diligence is a key step for future franchise owners. Learn more about this process here:
Looking for more support in starting a franchise unit? We can help. Log into your owner’s portal for a step-by-step guide to making your venture a success.