What to Watch Out for in Franchise Agreements

June 16, 2022

If you are planning to join a franchisee, you must read your franchise agreement thoroughly. Being a franchisee can be an excellent way of running a business. However, if, for example, you overlook an important term in your franchise agreement, problems could arise in the future. In this article, get to learn some of the terms you need to watch out for in a franchise agreement.

What Is a Franchise Agreement?

This is a legally binding contract between a franchisor and a franchisee. In order to become a franchisee, you must sign a franchise agreement. This agreement grants you, the franchisee, a license to operate under the franchisor’s trademarks and carry out business using the franchisor’s name.

A franchise agreement protects both the franchisor and franchisee. For example, a franchise agreement gives you the franchisee rights to help safeguard your investment.

Terms to Watch Out for in a Franchise Agreement

The following are some of the terms to watch out for in a franchise agreement;

Financial Terms

The franchise agreement will state how much you are expected to pay upfront. It will also state ongoing costs, which include fees for, among others, stocks and supplies and advertising. You should factor in all these costs in your business plan so you know if you can still make a profit.

Franchise Territory

The franchise agreement will contain a section detailing the boundaries of the area where you will be operating your business. You may be granted an exclusive territory or a shared territory. If, for example, you are granted an exclusive territory, you need to make sure that you know how many potential clients are in that territory and whether those potential clients will enable you to make a profit.

Length of the Original Term

This means how long you are expected to operate the franchise. Both short term and long term contracts have their advantages and disadvantages. A long term contract provides you with a chance to build a successful business and means you will not need to pay renewal costs often but increases the risk of being stuck in an unbeneficial business. On the other hand, a short term reduces the risk of being stuck in an unprofitable business but means you will incur higher renewal costs.

The Property Lease

Often, the premise from which a franchise operates is not owned by either the franchisee or franchisor. In most cases, either the franchisor or franchisee holds a lease. If, for example, the franchisor holds that lease, it means they will have additional control over your business.

Training and Support

The agreement will explain the training and support the franchisor will provide for your business. It is vital that you understand what training and support the franchisor owes you.

Ending the Agreement

The franchise agreement will contain details of how and when you can terminate your franchise. It will also explain how to transfer or sell the franchise. It is crucial that you understand these details, so you do not find yourself breaching the contract.

Contact a Business Attorney Serving Santa Clara County and Silicon Valley

Need help reviewing a franchise agreement? Contact the experienced business attorneys at SAC Attorneys LLP.