Looking at a franchise agreement

What Should I Look for in a Franchise Agreement?

By Franchise Information July 12, 2022

Before entering into a business relationship, it’s important to know as much about the other party as possible. But how do you investigate a franchise

You can start by reading the franchise agreement carefully. There are many reasons why you should start a franchise, but the franchise agreement is where the rubber meets the road and you determine whether the relationship is a good fit. Here is what you should look for in a franchise agreement.

How Much Are the Franchising Fees?

At its core, franchising is a financial arrangement. Franchisors earn money from the franchising fee, and in exchange, the franchisee gets the right to operate under their brand name and sell the company’s products. 

Franchising fees can vary, so it’s important to know how much the company expects, which may be particularly important if you need to borrow money to get your franchise started.

How Long Is the Agreement?

Once you open a franchise, there is not necessarily a guarantee that you’ll be there forever. 

The franchise agreement will lay out the terms of the agreement, including how long you’ll serve as the owner/operator of the franchise. For example, you may only be committing to this arrangement for five years, which might factor into your decision to make this commitment.

Can I Renew the Franchise Agreement?

If there’s a limit to the length of your franchise agreement, look for renewal options. A renewal clause may give you the right to renew the terms of your franchise agreement, which would potentially allow you to operate the franchise for a considerably longer time than the agreement initially states.

What Is the Timeline?

In some cases, the franchisor may have a clearly-defined plan for opening a new franchise location. This means that as the franchisee, you will be expected to hit certain benchmarks and milestones as your doors open and you start doing business. Read these carefully, and decide whether these timelines are within your reach.

What Support Does the Franchisor Offer?

By opening a franchise, you’ll get the support of a nationwide chain. This is a big reason why you should start a franchise since there’s a lot less risk than when you start a business from scratch. The franchise agreement should clarify what sort of support the company offers, such as training, help with equipment, or marketing materials.

Are There Monthly Royalties?

Besides the initial franchise agreement, many franchising companies will expect their franchisees to pay a monthly royalty fee. This means you’ll pay the franchisor either a flat fee or a percentage of your gross monthly income. If you’re not sure how this works, do some investigating. This can mean talking to other franchisees and gain some perspective from their experience.

Who Handles Marketing?

Marketing is easily one of the best reasons why you should start a franchise. When you operate under the brand of a nationwide chain, you also benefit from their marketing department. 

What does this mean for you? In many cases, the company will develop its own promotional strategies, and it’s your job to execute them. Find out whether they expect you to pay for any promotional materials or whether these materials are included as part of your other fees, and what marketing programs will be taken care of for you.

What Is My Territory?

The franchise agreement will also determine your operating territory. This means you’ll be permitted to operate within a specific geographical area, usually bordering (and occasionally overlapping) the territories of other franchisees (this varies by company). 

How do you investigate a franchise territory? You can always drive around the area to evaluate the competition and ensure this location is a good fit. The agreement may also include details about not competing with other franchisees in the area. Be sure to discuss this when doing your research because some concepts benefit greatly from being located close to each other.

What Is the Termination Policy?

The franchisor has the final say regarding your involvement in the franchise. Read this section carefully, as it spells out your rights as well as your franchisor’s rights. 

For example, if you fail to meet the terms of the agreement or terminate the contract prematurely, you may face penalties. Likewise, the company may reserve the right to end the agreement if certain terms and conditions are not met. If you’re unsure about the language, you may want to consult a lawyer before signing the franchise agreement.

Search for New Opportunities Near You

The best way to get a feel for a career in franchising is to explore opportunities in your area. You can start investigating franchises by using the finder tool on Franchise.com to locate opportunities near you.

About the Author - Franchise Information

A Trusted Industry Leader Since 1995. Founded in 1995, Franchise.com was one of the first franchise recruitment websites in the world. Today, we continue to be the 'go to' place for people beginning their business opportunity search and the journey of franchise ownership as well as for those already involved in the world of franchising.
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