Franchises have become a chance for people looking to start their own business in an already established brand to run a successful business. Whether you own the franchise or are looking to become a franchisee, one important document you will need is a Franchise Agreement.
Put simply; a franchise is a business opportunity. The franchisee is given legal authority to run a business using the ideas, expertise, and processes of the person owning the franchise (franchisor). Some popular examples of franchises are Subway, McDonald’s, Hertz, and Century 21.
What is a Franchise Agreement?
Also known as a Franchise Business Agreement, the Franchise Agreement is a legally binding document used as an agreement between the franchise owner (franchisor) and the franchisee, where certain terms are agreed to in order for the franchisee to use the franchisors business model to create their own business based on that model.
The Franchise Agreement lays out the requirements and expectations of the franchiser that the franchisee must agree to in order for the franchisee to run their business under the franchisor’s brand name. This would include how they expect the business to be operated on a day to day basis. Because the methods of operations, conditions, and terms can vary from one franchise brand to the next, there is no standard form for a franchise agreement.
What should be on a Franchise Agreement?
While each franchise agreement will be specific to the brand, there are some key things that should be on it.
- Territory/Location – a designated location for the franchisee to operate their business should be outlined, along with exclusive rights.
- Operations – should go over the expectations of running the day to day business
- Training/Support – most franchisors offer a training program to franchisees and their staff. Where and how this takes place should be detailed in the agreement, along with any ongoing technical support given.
- Duration – should give details of the duration of the agreement.
- Fee/Investment – gives details of the upfront franchise fee that needs to be paid in order for the franchisor to grant permission to the franchisee to use their operating system and brand/trademark.
- Ongoing fees/Royalties – should detail the royalty structure of the franchisor. This is usually a percentage of total sales that is paid on a monthly or quarterly basis.
- Trademark/Patent – should detail how the trademark of the franchisor can be used by the franchisee, including signage, logos, and patents.
- Advertising and Marketing – should detail the commitment to advertising by the franchisor along with any fees required to cover marketing costs from the franchisee.
- Renewal/Cancellation/Termination – there should be a detailed description regarding how the franchise is terminated or renewed by the franchisor.
- Exit Strategie – should detail the resale policy of the franchise should the franchisee wish to sell their franchise. It should also include any right of first refusal or buy back clauses that let the franchisor buy the franchise back.
You can download one of our free templates or samples to help get you started with your Franchise Agreement.
Sample Franchise Agreement for Services
Standard Franchise Agreement Template
Franchise Agreement Sample for Educational Institute
Franchise Agreement Sample
Franchise Agreement Sample for Restaurant
Laws Regarding Franchises
All franchise agreements in the USA are subject to both Federal and state laws that govern general principals of contracts. There is also a Franchise Rule set out by the Federal Trade Commission that will cover specific disclosures that the franchisor is required to make to the franchisee before any agreement can be signed. There are some states that authorize this rule and require notice, registration, or filing of a disclosure document by the franchisor. These states are:
- New York
- South Carolina
- North Carolina
- South Dakota
- North Dakota
- Rhode Island
Frequently Asked Questions
No. The owner of a franchise is considered an independent business owner and can’t be fired in the traditional way. They can, however, have their franchise terminated if they are in default of the franchise agreement.
This can differ from one franchise to the next, with some lasting 5 to 10 years and others lasting 10 to 20 years. Basically, the franchise contract should be long enough for you to be able to recoup your initial investment.
While this can change from one franchise to the next, a typical franchise fee is around $20,000 to $35,000. There are also royalty and ongoing franchise fees to be considered, which are separate from the original franchise fee.