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Franchising is a good way to grow a business and build a brand. From restaurants and gyms to service providers and retail stores, the franchise model offers entrepreneurs a proven path to owning their own business. But behind every successful franchise company is a clear and carefully structured agreement that ensures a smooth process.
In this article, we'll tell you what a franchise agreement is, what it includes, and how you can ensure you're protected before you sign the dotted line.
What is a franchise agreement?
A franchise agreement Is a legally binding contract between a franchisor (the brand owner) and a franchisees (the independent operator). It gives the franchisee the right to conduct a business using the franchisor's established brand, operating model, and intellectual property, usually within a specific area and for a specific period of time.
Basics of a franchise agreement
These principles create the conditions for how the franchise relationship works and what both parties can expect.
Involved parties.
Each franchise agreement unites two parties: the franchisor, who owns the brand, trademark, and proprietary business system, and the franchisee, an independent operator, who pays fees to operate a local outlet. The franchisor licenses its business model, while the franchisee agrees to comply with the brand's standards and operating guidelines.
Duration and duration.
Franchise agreements generally run for 5 to 20 years, with 10 years being the rule. Renewal options often allow extensions for similar periods of time. It's important to match the length of the franchise agreement with your rental agreement to avoid paying rent for a location that you can no longer use.
legal framework (international vs. local laws).
Franchise regulations vary around the world. In the US, franchisors must submit a Franchise Disclosure Document (FDD) before signing, while other countries such as Canada and EU members have their own disclosure and registration requirements. Some countries rely on general contract law rather than on specific franchise laws. Advice from a local expert helps to ensure compliance with regulations.
Fees and payments.
Franchise agreements detail all financial obligations, including initial franchise fees, ongoing royalties based on revenue, and contributions to advertising or marketing funds. Clarity about these payments is critical to understanding the total cost of ownership.
Territory and exclusivity.
The agreement often defines a protected area where the franchisee can operate without competition from other franchisees or the franchisor. The scope and enforcement of territorial laws vary, so you should carefully review the conditions to ensure adequate market protection.
training and support.
Most franchisors offer initial training and ongoing support to help franchisees succeed. The agreement should clearly define the scope and nature of this support — from operational guidance to marketing support.
Key clauses and components of a franchise agreement
Franchise agreements are detailed documents. Some of the key sections and clauses typically include:
- Granting of franchise and intellectual property license
The franchisor hereby grants the franchisee a limited, non-transferable license to operate a business under the franchisor's trademarks, service marks, trade names, and the franchisor's protected business system (“the Marks”) within the designated territory. The franchisee undertakes to use the brands exclusively in the manner approved by the franchisor and to comply with the standards set by the franchisor. - Franchisee obligations
The franchisee is required to:- Payment of all initial and ongoing fees under this Agreement, including royalties and marketing contributions.
- Opening and operating the franchise business in accordance with the standards and guidelines set by the franchisor.
- to use only approved suppliers, products, and marketing materials provided or approved by the franchisor.
- Maintain accurate financial records and provide regular sales and operating reports to the franchisor.
- comply with all applicable laws, regulations, and the terms of this Agreement.
- Franchisor's obligations
The franchisor is required to:- Training and support for franchisees and their employees in the initial phase and beyond.
- to provide the franchisee with an operating manual and its updates.
- Provide advice and support in the areas of marketing, advertising and operations.
- Carrying out regular inspections to ensure compliance with brand standards.
- Fees and payments
The franchisee agrees to pay the following amounts:- An initial franchise fee upon signing this agreement.
- Current license fees, which are calculated as a percentage of gross sales and are payable monthly.
- Contributions to advertising and marketing funds as stated.
- Any additional fees for technology, training, or other services set out in this Agreement
- Territory and exclusivity
The franchisee will operate exclusively in the area described in Annex A. The franchisor agrees not to issue any further franchises or operate proprietary units in this territory during the term of this Agreement, subject to the terms and conditions contained herein. - Non-competition and confidentiality
During the term of this Agreement and for a period of [X] years after its termination or expiration, the franchisee may not participate, directly or indirectly, in any business that competes with the franchisor's businesses in the specified geographical area. The franchisee undertakes to keep all protected information received from the franchisor confidential. - Duration and renewal
This Agreement is initially valid for a term of [X] years beginning on [Start Date] and ending on [End Date], with the option to extend it by [X] additional years by [X] years by mutual agreement and subject to compliance with the terms of the renewal. - termination
This agreement may be terminated by either party if there is a material breach, including but not limited to failure to pay fees, violation of operating standards, or bankruptcy. The franchisor will notify this in writing and give the franchisee the opportunity to remedy the infringement. After termination of the contract, the franchisee ceases using the brands and fulfills all obligations that exist following the termination of the contract. - settlement of disputes
All disputes arising out of or relating to this Agreement will be resolved through [mediation/mediation] in accordance with the rules set out in Appendix B, subject to applicable law as set forth herein. - Insurance and compensation
The franchisee is required to maintain, at his own expense, the insurance coverage required by the franchisor, including general liability, property and workers' compensation insurance. The franchisee agrees to indemnify the franchisor, its affiliates, officers, and employees from all claims, losses, damages, or liabilities arising out of the franchisor's operation of the franchise business by the franchisee or from a breach of this agreement.
Common mistakes and risks
New franchisees often overlook contract risks. Key pitfalls include:
Unclear or ambiguous provisions: Unclear wording in the agreement can lead to problems in retrospect. If the terms are ambiguous, both sides may interpret them differently, which may result in disputes. An inaccurate area description could, for example, enable the franchisor to place new units too close to each other. Always ask for clarification or amendment if clauses are unclear. Remember that courts usually interpret unclear language in favor of the party that did not write the agreement — often the franchisee.
No exit strategy: Some franchisees allow themselves to be engaged because they have not planned an exit. A common mistake is not thinking about how the contract may end. For example, if you want to sell the company or retire, the contract should allow a transfer to an approved buyer. Always make sure that you have the option to leave or sell the company and that these procedures are clearly defined. Otherwise, you could fall into a trap or be forced to close the company without getting back your investment.
Unbalanced commitments: Many franchise agreements strongly favor the franchisor. If the franchisor's commitments, such as support, marketing, and training, are weak or one-sided, your business may suffer. Be careful with clauses that impose onerous requirements on you without the franchisor providing anything in return. For example, a franchisor could insist on new technology upgrades at your expense but not commit to providing ongoing training. With the help of a lawyer, you can avoid unpleasant surprises if you recognize excessively onerous or unilateral conditions in advance.
Hidden fees and charges: Franchise agreements often include fees that go beyond the initial franchise fee and license fees. These may include marketing fees, technology costs, renewal fees, or required purchases from specific suppliers. If you overlook these additional costs, it could impact your profitability. Review the fee structure carefully to understand your overall financial obligation.
Restrictive operational controls: While consistency is key to success in franchising, overly tight control of business operations can limit your flexibility and ability to respond to local market conditions. Some agreements include rigid rules for suppliers, pricing, working hours, or product offerings. Make sure these controls are appropriate and that you have the ability to adapt to your market while maintaining brand standards.
Review and negotiation of a franchise agreement
The importance of legal counsel
Since franchise agreements involve significant financial obligations and complex requirements, it is important that an experienced franchise lawyer or business lawyer reviews the contract before signing. Legal counsel can help you understand confusing clauses, identify potentially unfair or unilateral provisions, and ensure that the contract complies with relevant local laws and regulations. Your expertise is invaluable to protect your investment and avoid costly misunderstandings or disputes.
Checklist: What you should pay attention to
FAQ - Common questions about franchise agreements
Can I cancel a franchise agreement?
Termination is only possible under certain conditions, usually in the event of violations. Franchisees can often sell or transfer with permission but cannot cancel at will.
Is a franchise agreement legally binding?
Yes Signing means that both parties must abide by all terms and conditions, so you should review them carefully before you commit.
How long do franchise agreements last?
Typically 5 to 20 years, often with extension options. Always check the term and renewal conditions.
What fees will I have to pay?
Expect upfront fees, license fees, marketing contributions, and potential additional costs such as training or technology costs.
What support can I expect from the franchisor?
Support typically includes training, marketing help, and operational guidance. Check out what's included.
Can I sell or transfer my franchise?
Most contracts allow transfers but often require franchisor approval and specific conditions.
What happens if the franchisor changes the terms?
Some agreements allow franchisors to update rules or fees. Find out how changes will be notified and what rights you have.
