You’ve gone through the whole process of learning the ins and outs of owning a franchise, done loads of research on which one is right for you, and you’ve figured out how you’re funding this new chapter in your professional life.
Now it’s time to put pen to paper and make it real. As with any type of major legal document like this, there’s a lot of stuff in there that prospective franchisees need to be aware of.
This article will break down what’s in the Franchise Agreement, how it’s different from the FDD, and encourage franchisee candidates to get a franchise attorney (again, we have covered this before, but it’s important for a mention here, too).
Franchise Agreement vs FDD
The Franchise Agreement is the final contract between the franchisor and the franchisee. It explains what the franchisor expects from the franchisee and how the franchisee will operate the business. It’s designed to protect both parties.
- The franchisor gives the right to the franchisee to use their intellectual property (IP), their operating systems, and brand name.
- The franchisee purchases the rights to use the franchisor’s intellectual property (IP), systems, and brand name if they meet certain conditions.
There is no standard franchise agreement because it addresses franchise operations, which vary widely depending on the franchisor and how they want their franchise to be run. Depending on what franchise you’re interested in, you will get a franchise agreement designed specifically for that franchise.
While the franchise agreement is written for a specific franchise and is the final contract, the Franchise Disclosure Document (FDD) is a federal legal document that is required to be given to individuals interested in buying a U.S. franchise prior to finalizing a deal. The FDD is considered part of the pre-sale due diligence process and consists of essential information that potential franchisees should consider prior to making a significant investment. Here’s a look at a sample FDD.
What to Look for in the Franchise Agreement
Franchise agreements are written to help maintain an earnest relationship between franchisor and franchisee. With so much investment at stake for both parties, it’s important to set standards and expectations so nothing is ambiguous and everyone understands the requirements of working together.
There are several factors spelled out in the franchise agreement. Factors include but are not limited to:
- The franchise relationship - This includes all the obligations of the franchisee, from ownership of IP to how they will operate the business meeting the standards specified by the franchisor.
- Duration of the contract - The investment and scope of a franchise mean that it can be a long-term agreement. During the time of the agreement, there may also be renewals discussed, the parameters of non-renewal, and termination.
- Territory - The franchise agreement will outline whether the franchisee gets a protected territory. The purpose of a territory is to limit saturation. You want your investment protected, so you don’t want another franchisee selling the same thing just a quarter-mile away.
- Site Selection - While the franchisee selects their own site, the franchisor has the right to approve, or not, the location.
- Training and Support - This lays out what the franchisor is offering to provide in terms of pre-opening and ongoing support with things like training, supply chain, and quality assurance.
- Fees and Expenses - All parts of the franchise agreement are important, but understanding the fees and expenses charged is paramount. Fees include the initial franchise fee and any ongoing fees, including monthly royalties, marketing and advertising, insurance, etc.
Seriously, Get a Franchise Attorney
*WARNING - if you don’t hire a franchise attorney you put yourself, and anyone else supporting you in your franchise endeavor, in financial danger. Hiring a franchise attorney is the best decision you can make to protect yourself and is the most critical move you’ll make as a franchisee. So, seriously, hire a franchise attorney.
There are more than a million attorneys in the US. It’s important that you find a franchise attorney, someone who specializes in franchise law. Specializing in this field of law means they spend their days working on franchising deals. Work with a franchise attorney only. When choosing a franchise attorney consider the following:
- How long have they been practicing franchise law?
- Have they written any published articles about franchise law?
- Who do they list as their clients?
- Do they have expertise on the franchisor side, franchisee side, or both?
- Is their primary focus on transactions (v. litigation), and are they equipped to help you look at and prepare your documents?
- Do they charge a flat fee or charge hourly? We recommend a flat fee so you know what to expect. Find out what is included in this flat fee.
- Do they work with other franchise attorneys as part of their team? Is there someone else who can step in and help as needed?
- Are they easy to work with? Are they accessible when you need them? Do you like their personality?
Remember, a franchise attorney provides advice about the new direction you’re taking. They know what you don’t and can help avoid the disasters that can harm someone who doesn’t know the industry, the complexities, and the pitfalls to avoid.
Sign on the Dotted Line
Before signing on the dotted line, there are important elements to cover in order to be confident in your choice of the franchise and the franchisor. Be sure to:
- Educate yourself about franchising, and do your research about what it means to be a franchisor and franchisee. Understand both sides so you know the entirety of franchising. Ask yourself these questions:
- What are my goals?
- How much do I have to spend? How much will this cost?
- Can I do this work for the long term?
- If I change my mind, how do I get out?
- Hire a franchise attorney by asking the questions we’ve outlined here. Hire the attorney, that’s best for the job and suits you. Their role is to review and carefully examine all documentation, support you in your franchising venture, and make sure you stay safe legally and financially.
As a final thought, becoming a franchisee is both a business and a lifestyle choice. The more diligent and rigorous you are about knowing all you need to before signing the Franchise Agreement the better opportunities await you as a franchisee.
Contact us to learn more about franchising!
