The 9 Provisions Every Franchise Agreement Needs to Have — and What They Mean Keep an eye out for the following provisions as you analyze a franchise agreement.
Are you in the process of becoming a franchisee and trying to make sense of the franchise agreement?
The franchise agreement is the legally binding contract between the franchisor and franchisee, and it consists of a series of provisions. Think of them as the rules of the road for franchise owners — they refer to the contractual terms and conditions that govern the relationship between a franchisor and a franchisee.
Why the provisions matter
Franchise provisions are vital because they establish the foundation for how the franchisee will operate their business and how the franchisor will support them to ensure consistency and quality across the larger brand.
Understanding all the franchise provisions involved helps protect everyone's interests and promote a positive business partnership.
The most important provisions in the franchise agreement
Franchise agreements can vary depending on the specific franchise system, industry and relationship between franchisor and franchisee. However, some provisions are generally included.
Keep an eye out for the following provisions as you analyze a franchise agreement.
- Franchise fees and royalties: The franchisor will typically charge an initial franchise fee, ongoing royalties and other types of fees. These fees can cover technology, intellectual property, training and more, and they can be on a fixed or sliding scale. Franchisees should be aware of all fees and royalties needed to understand the profitability of a business opportunity.
- Territory: The franchise agreement will define the geographic area in which the franchisee is allowed to operate. The size of the territory and the franchisee's exclusivity rights can have a significant impact on profitability and potential growth. Territory provisions will define the extent of a franchisee's territorial rights and any limitations or restrictions.
- Brand standards: Franchisees need to adhere to franchise standards to maintain the brand's image and ensure success. The standards to be followed will be listed in the franchise agreement and will have strict operating guidelines regarding signage and marketing, product quality, customer service and more. These guidelines are designed to ensure consistency and maintain the reputation of the brand.
- Training and support: The franchisor will typically provide initial and ongoing training and support to the franchisee, as business models are not static. This support is critical to the success of the franchisee, especially for first-time business owners or those new to the industry. The franchisee needs to understand the type of training and support provided and how to take advantage of it to maximize their success.
- Term and renewal: The franchise agreement will last for a defined period called a term. The term's length and renewal options will be specified in the franchise agreement. The franchisee should understand the term and renewal options because this is a legally binding agreement.
- Termination: The franchise agreement will specify the scenarios in which either the franchisee or franchisor may terminate the franchise relationship. Termination could be mutually agreed upon or it can be the result of contract breaches or failure to meet company standards. This is an important consideration for the franchisee, as termination can have significant financial and legal implications.
- Insurance and indemnification: The agreement may require the franchisee to obtain certain types of insurance coverage, such as general liability insurance, property insurance, workers' compensation and more. The franchisee may also be required to indemnify, or compensate, the franchisor against certain types of claims or liabilities.
- Dispute resolution: The agreement will outline the process for resolving disputes between the franchisor and franchisee over various matters. Resolution options may include arbitration or mediation to avoid going to court.
- Non-compete clause: The agreement may include a provision that prohibits the franchisee from operating a similar business in the same geographic area for a certain period after the franchise relationship ends. The goals of these clauses are to protect the franchisor's reputation, intellectual property and financial interests.
Final thoughts before entering an agreement
It's important for the franchisor and franchisee to carefully review and methodically negotiate the franchise agreement provisions. The best agreements will be fair and equitable for both parties to provide the best chances for mutual success.
To ensure that happens, the franchisor should provide a clear understanding of all of the terms and conditions of the agreement, and the franchisee should review and seek clarification on anything that is unclear or could become problematic. Remember: It's important to seek advice from a local legal professional before signing and starting your business.