What Aspiring Franchisees Need to Know About Franchise Agreements

Businessman discussing franchise agreement

Businessman discussing franchise agreementA franchise agreement is the keystone document that specifies the relationship between you and your franchisor. This is a legally binding document that details the responsibilities and rights of the franchisor and franchisee. Your franchisor might give you the agreement separately or attached to the Franchise Disclosure Document (FDD). Either way, you have to get this agreement at least five days prior to signing it. In general, your franchise agreement should contain the following information:

  • Your obligations concerning running the franchise and the responsibilities of the franchisor to you.
  • Initial and continuing support and training, including the costs for these. Whether you’re investing in a Middle Eastern fast food franchise or an energy business franchise, explains that franchisors offer various initial and ongoing support for training employees, marketing, quality control, location support, as well as supply chain management.
  • Your territory. Not all franchisors grant franchisees protected or exclusive territories. If they do, the establishment of the territory should be clearly defined.
  • Your franchise’s initial duration and renewal policies, including the relationship terms, your successor rights, and requirements for upgrading your location and/or territory.
  • How you should deal with intellectual property including signs, patents, and trademarks.
  • Initial and ongoing costs. In general, you need to pay an initial and ongoing fee for the right to operate as a franchisee. Most agreements also include various fees related to supporting your franchise, such as a Brand fund or marketing fund.
  • Minimum insurance requirements. The agreement would specify how much insurance coverage you’d need before opening and all throughout the duration of your agreement.
  • Potential tax issues and implications.
  • What would happen if you want to transfer your franchise or sell it.
  • Marketing and advertising policies.
  • How disputes would be settled.
  • Specific grounds for cancelling or terminating franchisees.

Now that you know what a franchise agreement is and what it contains, your next step is to read it and ensure that you understand each term and condition in it. It’s in your best interest to have the agreement looked over by a franchise lawyer or a consultant before you sign it, so you could clarify issues you don’t fully understand and try to negotiate some of the terms with your franchisor.

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