What You Need to Know Before Signing a Franchise Agreement

What You Need to Know Before Signing a Franchise Agreement

Deciding to invest in a franchise can be a smart business move. However, buyer beware, it’s best to fully understand the terms of any franchise agreement before you sign on the dotted line. Owning a franchise can cut out a lot of the guesswork that comes with starting a new business. You’re given a leg up when it comes to time-tested strategies and marketing tools. However, a thorough understanding of what’s required of you and the franchisor is a necessity. 

What is a Franchise Agreement?

In simple terms, a franchise agreement is an obligatory legal document and formal agreement between the franchisee and franchisor. This legal document clearly outlines the expectations and required operating procedures required for both the franchisee and franchisor. This document spells out the expectations, responsibilities, authorities, and limitations for operating the franchise. This agreement also includes a fee schedule that the franchisee is responsible for adhering to and following. These fees include specific amounts and percentages that must be paid by the franchisee according to a predetermined payment schedule. The terms of a franchise agreement can typically last anywhere from five to twenty-five years. However, some of the terms and requirements may be negotiable and should be discussed with the franchisor before signing any agreements. 

What are the Benefits of Owning/Operating a Franchise?

As a franchisee, you have the right to use the franchisor’s intellectual materials and resources for a pre-set amount of time. However, the requirements outlined in your agreement must be followed to the letter and the franchisee can only use the resources they were given the right to use. There’s little to no wriggle room in the terms once you’ve signed on the dotted line. The goal of any franchise is to create a turnkey business for the franchise that looks uniform and consistent regardless of where you see that particular brand. For example, regardless of where you go, the McDonalds in Austin, Texas should be consistent with the McDonalds in Bakersfield, California in operation and appearance. 

Franchisors are required by federal law to disclose 23 key points about the franchise which must be outlined in a franchise document agreement before a franchisee signs anything. If an agreement outlines required fees, the use of trademarks, and a marketing system, it’s considered a franchise agreement. However, other provisions can often be negotiated.