Franchise agreements are legal contracts that define the relationship between a franchisor and a franchisee. They outline the rights, obligations, and operational rules for both parties. These agreements can be lengthy and complex, but understanding the key terms is crucial before signing.

Key Takeaways:

• Initial Costs: Expect a one-time startup fee ranging from $10,000 to $50,000, plus monthly royalty and marketing fees (typically 4-8% and 1-5% of revenue, respectively).

• Territory Rules: You may receive a protected territory, but exceptions like online sales or national accounts might apply.

• Operational Standards: Includes rules for business hours, technology, quality control, and reporting to ensure uniformity across locations.

• Training: Franchisors provide pre-launch and ongoing training to help you meet their standards.

• Contract Length: Terms usually last 5-20 years, with renewal options.

• Red Flags: Watch for high fees, pressured sales tactics, or restrictive clauses. Always consult a franchise attorney before signing.

Quick Comparison of Common Costs:

Before committing, review financial obligations, territory rules, and operational standards. Consulting an expert ensures you understand the terms and avoid potential pitfalls.

How to Review Franchise Agreement | Don't Sign Until You ...

Money and Fees

Getting a clear picture of the financial commitments in your franchise agreement is essential for success. Below, we break down the key fees to help you plan your investment.

One-Time Startup Fee

The initial franchise fee is a one-time payment that grants you the right to use the franchisor's brand, systems, and intellectual property. This fee generally ranges from $10,000 to $50,000, depending on the brand. It often covers:

• Initial training and setup support

• Access to proprietary business systems

• Rights to use trademarks and branding

• Marketing materials and guidance

• Territory rights and location assistance

"The franchise fee is something you pay up front to get started. It gives you permission to use the franchisor's name and proprietary business systems. You get the complete setup. Franchise fees allow you to own and operate the business. It is a one-time fee."

Here are examples of initial fees for popular franchises:

After paying the startup fee, you'll need to factor in ongoing costs like monthly royalties.

Monthly Royalty Payments

Royalty fees are regular payments made to the franchisor. Data shows that 94% of franchise organizations charge these fees, which typically range from 4% to 8% of your monthly gross revenue. These payments go toward:

• Brand growth and development

• System-wide updates

• New technology

• Ongoing operational support

On average, royalty fees are around 6% of monthly gross revenue.

Marketing Fund Contributions

Marketing fees help fund advertising efforts for the entire franchise network. These contributions are usually 1% to 5% of monthly gross revenue. They enable large-scale campaigns that individual franchisees couldn't manage on their own.

"Franchise advertising fees are critical to the success and growth of any franchise system, providing the financial foundation for wide-reaching marketing campaigns that enhance brand visibility and stimulate consumer interest."

For example, one franchise requires 1% of gross sales to be allocated to their advertising fund. These funds typically support national campaigns, digital initiatives, market research, brand development, and local marketing assistance.

Understanding these costs will help you as you move on to review territory and location rules.

Territory and Location Rules

Once you've got a handle on your financial responsibilities, it's time to look at how territory rights and location rules shape your franchise operations.

Protected vs. Open Territories

Most franchise agreements outline specific territory rules that set your operational boundaries. A protected territory gives you exclusive rights to operate in a defined area, reducing competition from other franchisees of the same brand.

Territory boundaries are typically defined in one of these ways:

Smappen describes a protected territory as an exclusive area, though exceptions often apply.

These exceptions can include:

• Alternative distribution channels (e.g., online sales)

• Captive markets (e.g., airports, colleges)

• National account customers

• Private label products

Once your territory boundaries are clear, the next step is to review the franchisor’s process for selecting and approving a location.

Location Requirements

Franchise site selection is usually governed by strict franchisor criteria. Brands like McDonald's and 7-Eleven are known for their rigorous processes to maintain brand standards and ensure profitability.

The location selection process typically involves:

1. Initial Site Review: Franchisors evaluate potential sites based on factors like demographics, traffic patterns, parking availability, competition, and building suitability.

2. Approval Process: This stage involves submitting detailed site plans, market analysis, financial forecasts, and lease agreements for franchisor review.

3. Relocation Terms: Franchise agreements often include conditions for future relocations. For example, 7-Eleven allows franchisees to move locations while retaining the right to open corporate stores within the protected territory.

"A protected franchise territory refers to a specific area that a franchisor grants the franchisee the right to operate within, meaning other franchisees and sometimes the franchisor itself are unable to enter that market."

Understanding these rules helps ensure you're set up for success within your assigned territory.

Business Standards

Once the territory and location are set, the next step is ensuring consistency in daily operations.

Daily Operations Rules

Franchise agreements outline rules to maintain uniform quality and a cohesive brand experience across all locations.

Here are some common operational standards:

"Adherence to franchise quality standards is not just a regulatory requirement, it's a cornerstone of franchise success." - FMS Franchise

To meet these standards, successful franchisees often:

• Conduct regular quality checks

• Use digital tools for monitoring

• Keep thorough operational records

• Gather and analyze customer feedback

• Build a team culture focused on quality

Strict daily operations go hand-in-hand with the training provided to franchisees, ensuring smooth implementation.

Required Training

Training is key to helping franchisees and staff replicate the brand's proven formula.

1. Pre-Training

   • Complete online learning modules at home

   • Obtain any necessary third-party certifications

   • Receive guidance on site preparation

2. Core Training

   • Duration: 1-4 weeks

   • Location: Franchisor headquarters or designated venues

   • Participants: Franchisee and unit manager

   • Focus: Day-to-day operations, brand standards, and system procedures

3. Opening Support

   • On-site help during the launch phase

   • Staff training coordination

   • Setup of operational systems

Franchisors often provide tailored training for different roles, including Operating Principals, Unit Managers, Front-line Staff, and Franchise Owners. Additional training may be required for new product rollouts, system updates, refresher courses, or advanced skills.

Contract Length and End Terms

Contract Duration

Franchise agreements generally last between 5 and 20 years, depending on the type of business and the initial investment required. For example, fast-food franchises often have a 10-year term, while hotel franchises may extend up to 20 years due to larger upfront costs.

"It is important that both parties ensure that the duration of the term aligns with the parties' business plan, allowing enough time for the franchisee to recoup its investment."

• Manning Fulton

Once the contract duration is set, it's essential to understand how the agreement concludes, whether through natural expiration or an early exit.

Ending the Agreement

Franchise agreements typically end in one of three ways:

• Natural expiration: The contract ends on its scheduled date, with renewal notice required at least 6 months in advance (or 1 month for agreements lasting less than 6 months).

• Early termination: Either party may terminate the agreement under specific conditions outlined in the contract.

• Business sale: The franchisee may sell the business, but this requires the franchisor's approval and adherence to transfer conditions.

Key Renewal Tips:

• Start renewal discussions 6–12 months before the contract ends.

• Review updated disclosure documents for any changes.

• Examine new terms and conditions carefully.

• Consult a lawyer before signing renewal agreements.

• Complete any required training programs.

• Ensure facilities meet current franchisor standards.

• Renew or renegotiate the lease for the business location.

Before deciding on renewal, take a close look at your business's performance and future potential. Consider factors like profitability, market trends, and your relationship with the franchisor to make an informed decision.

What to Watch For

Warning Signs

When reviewing a franchise agreement, keep an eye out for potential red flags. Financial issues often stand out the most. For example, unusually high fees compared to industry norms or no noticeable growth in the franchise system for more than three years could signal deeper problems.

Other critical areas to examine include:

• Mandatory supplier provisions: These can restrict your ability to shop around for competitive pricing on materials.

• Non-competition clauses: These may impose restrictions on your activities after the franchise ends.

• Default clauses: Look for terms that heavily favor the franchisor and could put you at a disadvantage.

"If you feel that the representative pushes you to buy the franchise as quickly as possible, then it is time to take a good second look at the franchise." - Franchise Now

If any of these issues come up, consult a legal expert immediately to protect your investment.

Legal Review Steps

Spotting red flags is just the beginning. A detailed legal review is crucial to address concerns and ensure you're making an informed decision. Emily Sadler, Senior Commercial Solicitor, advises:

"Working with an experienced franchise solicitor can help you identify any onerous or unusual terms, so you know exactly what you're signing up for. This preparation can help you enter a franchise agreement with clarity and confidence, allowing you to be better placed for franchise success."

Here’s what a legal review typically involves:

1. Contract Review
Franchise attorneys will carefully examine the agreement, paying special attention to indemnity and personal liability clauses.

2. Due Diligence
Verify key aspects of the franchise, such as:

• The franchisor's financial health

• History of legal disputes

• Growth trends within the system

• Available support programs

3. Negotiation Support
While many terms are standard, an attorney can help identify areas where adjustments might be possible, such as:

• Territory size and exclusivity

• Renewal terms

• Training obligations

• Flexibility in operating manual requirements

"Potential franchisees will be best served by seeking out the guidance of a qualified franchise lawyer. You are making a very substantial investment and this decision deserves your time and attention." - FranchiseHelp

Next Steps

Now that you’re aware of key franchise terms and potential red flags, it’s time to take action to safeguard your investment. Franchise agreements can be complex, so a thorough review and expert advice are crucial.

Start by carefully examining the franchise agreement. Pay close attention to areas like financial commitments, territorial rights, and termination clauses. These sections often contain critical details that can impact your investment. Industry experts emphasize the importance of having a legal professional review the agreement to ensure nothing is overlooked.

Here are some steps to help protect your interests:

• Document verbal promises: Keep a written record of any commitments made during discussions.

• Seek legal review: Have both the Franchise Disclosure Document (FDD) and franchise agreement reviewed by a seasoned franchise attorney.

• Clarify unclear terms: Don’t hesitate to ask for explanations if something seems vague or confusing.

• Get modifications in writing: Make sure any agreed changes are documented and included in the final agreement.

Our franchise consultants are here to assist you through this process. We can connect you with vetted opportunities and provide expert guidance as you evaluate franchise agreements. By understanding your goals, we aim to ensure you have the resources needed to make confident, informed decisions about your franchise investment.

While reviewing these agreements can feel overwhelming, taking the time to address these steps now can set you on the path to success as a franchise owner.

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