The Franchise Agreement – 7 Points to Be Crystal Clear On
Some of the candidates that I work with as a franchise consultant are not crystal clear on the overall importance of the franchise agreement and what it represents.
The UFOC (or franchise disclosure document) provides potential franchisees with specific information about the franchisor and their system during the early stages of the due diligence process. Some candidates make the mistake of “speed reading” or scanning the franchise agreement because they have a good understanding of the details outlined in the FDD. This is not a good idea.
The franchise agreement is the actual written contract signed by both the franchisor and the franchisee upon completion of a franchise sale. The franchise agreement is the heart and soul of the business relationship between the two parties. It spells out in very specific detail how the franchisor expects the franchisee to conduct business, and outlines the obligations of both parties.
All franchise agreements are not identical, but they do contain similar provisions, and I have listed seven of the key items below, along with a brief explanation.
Territory Guidelines. Most franchise agreements will designate a very specific territory in which the franchisee may do business. Sometimes exclusive territorial rights are granted.
Fees Payable To The Franchisor. This includes the total investment, franchise fee, and ongoing royalties and when the royalties are to be paid.
Services Provided By The Franchisor. Outlined here is the ongoing training and support, advertising commitments, and the products and services to be provided by the franchise.
Term And Renewal Of Agreement. The specific period of time of the agreement is defined here, as well as renewal details. The typical duration is somewhere between 5 and 20 years. Termination policy is discussed as well.
Site Selection. This section indicates who is responsible for site selection and the level of assistance provided by the franchisor. Ultimately, the franchisor reserves the right of final approval of the location.
Advertising And Promotions. The franchisor must approve the content, appearance, and frequency of advertising executed by the franchisee.
Selling And Transfer Rights. Franchisors typically reserve the right to approve the terms of any transfer and the transferee. Also, franchisors usually specify that they have the right of first refusal or to buy back a franchise.
Since this is the binding contract between the franchisor and the franchisee, I always highly recommended that you hire an experienced franchise attorney to review the agreement in its entirety so you have a clear understanding of all of its contents. An attorney who is inexperienced with franchise law will not be qualified to adequately ensure your complete understanding of the details set forth in the franchise agreement.
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