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Does your franchise agreement contain these critical elements?

On Behalf of | Oct 13, 2022 | Franchise Law

Before signing a franchise agreement, be sure that you understand that terms of the agreement and that the agreement you enter into is sufficient to protect your interests.

Understanding some basic elements of a franchise agreement can help guide your business in a positive direction. You should always consult with a franchise attorney before signing a franchsie agreement.

Here are some of the factors to consider and inspect before you continue buying a franchise.

Location, location, location

Location is an integral part of any business’s success. For instance, if you want to open a franchise in a particular spot, you want to ensure that the franchisor does not allow anyone else to open one in a competing area.  Some franchisors will not provide any protection from competition.  Others will grant a franchisee a territory and maintain responsibility for protecting that territory, provided the franchisee meets certain obligations.  The protection the franchisor offers may be limited.  For example, the franchisor may retain the right to compete with the franchisee itself, even in the territory.

Royalties and Ad Fund Contributions

Most often, franchisors provide franchisees with training, marketing and advertising assistance, system standards to follow, and permission to use the franchisor’s marks and system, in exchange for compliance with the franchisor’s system requirements, and payments of royalties and contributions to an advertising or marketing fund.

Carefully reviewing the Franchise Disclosure Document and franchise agreement should help you understand how much you can expect to pay the franchisor in royalties and in contributions to any advertising fund.

Term, Renewal, Termination, Transfer

The franchise agreement should clearly state how long the agreement will remain in force and any rights you have to extend or renew that initial term.  You should identify any notice requirements for renewal to be sure you do not accidentally miss a deadline.  You also need to understand what the franchisor means by “renewal” and whether you may be asked to sign a new contract with different terms and conditions if you decide to renew.

You probably will not have the right to terminate the franchise agreement.  If you do have the right, there may be only specific reasons for doing so and procedures that you will have to follow.

Franchisors can terminate the franchise agreement and you will probably have limited rights in response.  Talk to a franchise attorney about the franchise agreement and laws that might apply.

Your ability to sell your franchise will also be limited by the franchisor’s rights to determine things about its system.  The franchise agreement should contain a transfer provision that you should understand before you sign.

Covenants against competition

Being a franchisee means accepting restrictions on your ability to work elsewhere, during and after your time as a franchisee.  It ususally also means limits on your ability to make certain investments.  Your family and employees will likely be required to accept those restrictions, as well.

It is important that you fully understand the franchisor’s requirements and expectations before signing the franchise agreement.

You should always seek the guidance of a franchise attorney before signing a franchise agreement.