What to Look For in a Franchise Agreement

The franchise agreement is the legally binding contract that defines the relationship between the franchisor and the franchisee. While the FDD provides disclosure, the franchise agreement establishes the specific terms you must follow once you sign. It governs everything from fees and territory rights to operational standards and renewal conditions.

Because franchise agreements typically last 5 to 20 years, understanding the terms before signing is essential.

The Purpose of the Franchise Agreement

The agreement outlines:

• Your rights as a franchisee
• The franchisor’s obligations
• Operational rules that must be followed
• Financial commitments
• Branding and quality standards
• Conditions for renewal, transfer, and termination

It ensures a consistent system across locations and protects the franchisor’s brand while defining the framework for franchisee success.

Key Sections to Review Carefully

1. Territory Rights

This section explains whether your territory is:

• Exclusive
• Protected
• Non-exclusive

It clarifies whether the franchisor can:

• Open corporate stores nearby
• Allow other franchisees in your area
• Sell through alternative channels (online, delivery, kiosks)

Strong territory protection can significantly influence long-term performance.

2. Fees and Payment Obligations

The agreement specifies all required fees, such as:

• Royalty payments
• Marketing fund contributions
• Technology fees
• Renewal fees
• Transfer fees
• Required purchases from approved vendors

Understanding the full fee structure helps assess profitability and ensures there are no surprises later.

3. Term Length and Renewal Conditions

Most agreements last multiple years. Pay attention to:

• The initial contract term
• Renewal rights and conditions
• Whether renewal fees apply
• Whether renewal requires facility upgrades

These terms affect long-term planning and exit options.

4. Operational Standards and Compliance

Franchisees must follow the franchisor’s standards to maintain brand consistency. Agreements usually outline:

• Training requirements
• Approved suppliers
• Operating hours
• Local marketing expectations
• Reporting and financial transparency
• Technology systems you must use

Deviating from brand standards can lead to compliance actions, so clarity is essential.

5. Marketing Requirements

Franchise agreements often include:

• Mandatory national advertising contributions
• Local marketing requirements
• Use of approved marketing materials
• Guidelines for digital advertising, social media, and promotions

These obligations ensure brand alignment, but they also affect local budgets.

6. Support and Training

While the FDD outlines the franchisor’s support, the agreement defines:

• What training is provided
• The franchisor’s right to update systems or processes
• Ongoing support obligations
• Requirements for additional training if performance declines

This section clarifies what you will receive after opening.

7. Transfer and Sale Conditions

If you choose to sell your business later, the agreement controls the process. Key elements include:

• Franchisor’s approval rights
• Transfer fees
• Buyer qualifications
• Training requirements for the new owner

Understanding these conditions is important for long-term exit planning.

8. Termination Rights

Both franchisor and franchisee have termination rights, but they are rarely equal. The agreement may list:

• Conditions for immediate termination
• Conditions requiring notice
• Cure periods for violations
• Rights after termination (such as removing trademarks and returning manuals)

It’s essential to know what situations could jeopardize your contract.

9. Post-Termination Obligations

After termination or expiration, franchisees typically must:

• Stop using the brand
• Return confidential materials
• Transfer customer data
• Follow non-compete and non-solicitation clauses

These obligations can impact your ability to operate another business in the same industry.

Why Legal Review Is Important

Franchise agreements are drafted to protect the franchisor’s intellectual property and brand integrity. They are detailed and often non-negotiable. Because of the long-term commitment and potential financial implications, reviewing the contract with an experienced franchise attorney is recommended.

A legal expert can help evaluate:

• Whether the terms are fair
• How they compare to similar systems
• Potential risks to profitability
• Conditions that may limit future flexibility

This review is one of the most important steps before signing any franchise agreement.

The Bottom Line

The franchise agreement defines your rights, responsibilities, and long-term obligations as a franchise owner. Understanding territory rights, fees, renewal terms, operational standards, and exit conditions helps ensure the agreement aligns with your goals and expectations.

A clear review before signing sets the foundation for a strong, predictable franchise relationship.