14. Insurance and Indemnification
The franchise agreement will include the requirement for the franchisee to maintain certain insurance coverage throughout the term of the franchise. Expect indemnification clauses, as well. For example, the franchisee will probably be required to “indemnify, defend and hold harmless” the franchisor against any claims, costs, damages and expenses arising out of the franchisee’s activities.
15. Records and Audits
As the franchisee you will be required to maintain accurate records and provide regular financial and operations reports. Since royalty payments are often a percentage of gross sales, reporting accurate sales numbers is especially important. The franchisor usually has the right to request additional information including tax returns and to audit your records. You could be charged an audit fee, also.
16. Physical Premises and Renovations
If the business is a restaurant or retail premises where consumers visit, franchisees will have substantial obligations to maintain the premises in good repair at their sole expense. The franchisor usually reserves the right to inspect the premises to make sure they are well maintained.
You may be required to renovate once every 5 to 10 years (or sooner if needed). Renovation might involve considerable expense, including replacing upholstery, furniture or fixtures to meet the franchisor’s standards.
Your ability to be creative could be severely curtailed. For example, you might not be able to even choose different paint colors without the franchisor’s approval.
17. Transfer and Re-Sale
Franchise agreements will outline any rights to transfer the franchisee’s ownership interest in the franchise relationship to a buyer. Sometimes franchisors retain the right of first refusal, meaning they get the first chance to buy your business if you decide to sell.
Also, franchisors typically reserve the right to approve buyers. The franchisor may impose many requirements on a buyer, including the need to submit an application and pay the initial fee.
In practice, transfer rights are tricky and will require adept structuring if you go to sell. You will need to guard against the buyer backing out or going around you directly to the franchisor.
18. No Industry Standard Agreement
There is no such thing as a standard franchise agreement for the entire industry. Every franchise brand creates its own contract documentation. Most agreements contain common types of provisions, but they won’t be worded exactly the same.
Prospective franchisees often want to know if they can negotiate the franchising agreement. Technically the answer is yes. You should always try to negotiate. However, be prepared for the franchisor to refuse. The nature of a franchise system is such that the franchisor tries to keep all requirements uniform.
A franchise agreement is a contract of adhesion, meaning it’s created by one party with greater bargaining power using standard form provisions. However, sometimes it’s possible for franchisees to negotiate minor points such as an installment schedule for the initial franchise fee.
The more popular the franchise, the less likely you can successfully negotiate. A well-established franchisor has little incentive to make one-off concessions. However, if you are one of the first in a new franchise, you might have more negotiating leverage.
20. Review with a Lawyer
Regardless of whether you are able to negotiate terms, it’s still important for you to get a franchise lawyer to review the franchise agreement and the FDD.
An experienced franchise lawyer can explain important provisions of the franchise agreement. A franchise lawyer may also be able to point out unusually harsh or one-sided provisions that are not common in the industry. An experienced attorney will understand what to look for in the Franchise Disclosure Document, and can identify red flags. Also, the attorney may know of common law and state laws that protect franchisees. Knowing key points before signing could save you from making a big mistake.
Read more: The Importance of Hiring a Franchise Attorney.
Franchise Agreement Summary
|Key Points in Franchise Agreement||Description|
|1. Disclosure||Franchise falls under FTC's Franchise Rule, requiring a Franchise Disclosure Document (FDD).|
|2. Trademark and Intellectual Property||Franchisee granted rights to use franchisor's name, trademarks, and intellectual property.|
|3. Support and Training||Franchisor's obligation to provide training and support services, both before and during the term.|
|4. Advertising||Franchisor's obligation to support franchisees with marketing and advertising.|
|5. Long Term Duration||Franchise agreement's duration, typically 10 to 20 years, with conditions for renewal.|
|6. Signed and in Writing||Every franchise agreement should be in writing and signed by both parties.|
|7. Territory||Outline of protected or exclusive territory granted to the franchisee.|
|8. Fees and Expenses||Costs of franchising ownership, including initial and ongoing fees and expenses.|
|9. Site Selection||Franchisee's right to select a location, subject to franchisor's approval and standards.|
|10. Termination||Conditions and rights for early termination, usually favoring the franchisor.|
|11. Obligations upon Termination||Requirements to unwind the business relationship after termination or expiration.|
|12. Non-Competes||Restrictive covenants limiting franchisee's competing activities during and after the term.|
|13. Arbitration||Dispute resolution through arbitration, often with franchisor's jurisdiction preference.|
|14. Insurance and Indemnification||Franchisee's obligation to maintain insurance coverage and indemnify the franchisor.|
|15. Records and Audits||Requirements to maintain accurate records and provide regular reports and audits.|
|16. Physical Premises and Renovations||Franchisee's responsibility to maintain and renovate premises according to franchisor's standards.|
|17. Transfer and Re-Sale||Outline of rights to transfer franchise ownership and franchisor's approval process for buyers.|
|18. No Industry Standard Agreement||Franchise agreements vary between brands and may contain unique provisions.|
|19. Negotiating||Prospects can attempt to negotiate minor points, but franchisors often maintain uniform requirements.|
|20. Review with a Lawyer||Regardless of negotiation, consulting a franchise lawyer to review the agreement and FDD is crucial.|
The franchise agreement is a document with the rights and obligations of the parties outlined. The franchise relationship is not employer-employee. As the franchisee you operate a separate business in accordance with the franchise system. You are an independent business owner and the franchise agreement reflects this separation of interests.