What Is a Franchise Agreement?
A franchise agreement is a legally binding contract between a franchisor and a franchisee. It outlines the terms under which a franchisee will operate a unit of the franchisor’s branded business.
The parties refer to it to understand the initial fees, ongoing royalties, territory rights, and contract duration. The franchisor sets limits on how the franchisee can operate the business. This flexibility gives them opportunities to expand while maintaining operational standards.
What Is a Master Franchise Agreement?
A master franchise agreement takes the standard franchise agreement one step further. It grants the franchisee the right to sell sub-franchises to other franchisees within a defined territory. Under this, the franchisee acts as a regional franchisor. However, they remain bound to their contract with the parent franchisor.
How Does a Franchise Agreement Work?
The beginning of a franchise agreement involves the franchisor and franchisee meeting to discuss the terms of the contract. The franchisor sets many of the terms based on their established business system, some of which are non-negotiable.
The franchisee must agree to these terms to have the opportunity to run a unit of the business. However, the parties may be able to negotiate some terms, such as the initial franchise fee or the territory size.
Before the franchisee can sign the agreement, the franchisor must comply with two federal disclosure requirements under the FTC franchise rule:
- The 14-day disclosure requirement. This is the baseline requirement for every franchise sale in the US. The franchisor must provide the Franchise Disclosure Document (FDD) to a prospect at least 14 calendar days before they sign a binding contract. It prevents high-pressure sales and gives the franchisee time to vet the franchisor’s financial health.
- The seven-day FTC franchise requirement. The Federal Trade Commission (FTC) sets a seven-day requirement that only applies if the franchisor makes unilateral changes to the agreement. The franchisor must give the prospective franchisee the final version at least seven calendar days before signing. This waiting period is waived if the franchisee initiated the changes or already agreed to the modifications.
Once the parties execute the agreement, the franchisee can only operate their unit of the business as defined by the contract. They must often use approved suppliers, contribute to national or regional advertising, and keep the core business’s hours and signage. A franchise agreement does not allow the franchisee entrepreneurial freedom (like they’d have if they ran their own business).
What Information Is Included in a Franchise Agreement?
A comprehensive franchise agreement defines the parties and the rules the franchisee must follow to run a unit of the franchisor’s business. Here are the key elements to include in your franchise contract agreement template.
1. Franchise Setup
Describe the type of business that the franchisee will operate. It can be a business centered in the retail, restaurant, service, or lodging industries, for example. Briefly describe the business’s system, noting what makes it unique, such as the use of proprietary software or methods.
List the franchisor’s and franchisee’s information, including the following:
- Full legal name
- Type of legal entity
- Primary business address
- State of operation
Can a Franchisee Be an Individual Person?
Technically, a franchisee can be an individual person. However, franchisors often require their franchisees to create a separate entity to remove the risk of personal liability. Franchisees can set up a corporation with articles of incorporation or form an LLC with the LLC articles of organization.
2. Ownership Details
Name all of the owners of the franchise and their roles in the business. Indicate what ownership percentage each one has.
You should also establish a minimum percentage of ownership that will require the owner to hold a personal guarantee. For example, say you establish 20% as the minimum requirement. Under this arrangement, any owner with at least a 20% ownership stake will be personally liable for the franchise’s contractual obligations.
Franchises & Partnerships
If two partners will be franchisees together and share the partnership equally, they can write a 50/50 partnership agreement. Their franchise agreement binds them to the franchisor, but the partnership agreement defines their internal roles and prevents disputes.
3. Approved Location
List the address where the franchised business may operate. The permitted location is usually confined to the address listed in your franchise contract agreement. In most cases, the franchisee will need to seek the franchisor’s approval to open additional locations.
Your agreement should also define territorial rights. These define whether the franchisee is granted an exclusive or non-exclusive area for their operations. An exclusive area means that only the franchisee can operate the unit within a specific region. A non-exclusive territory offers no geographic protections.
4. Term Length & Renewal Conditions
State the length of the franchise agreement, which informs the franchisee how long they will be able to run the business. The length can vary depending on your situation, but it’s often between five and 20 years. Be sure to outline renewal conditions so the franchisee can renew if business goes well during the initial term.
5. Fees
Describe the fees that the franchisee will have to pay to the franchisor:
- Initial franchise fee. The one-time, upfront fee to join the business system.
- Royalty payments. A percentage of gross revenue to support brand operations.
- Minimum royalty payment. The minimum amount the franchisee must pay in royalty payments, even if gross revenue is low.
- Interest on late payments. Record an interest rate to encourage timely payments from the franchisee.
- Marketing fees. These can cover system-wide marketing efforts and local advertising.
- Technology/system fees. Payments to cover software systems, reporting tools, and franchise management systems.
6. Compliance & Training Requirements
Outline various aspects related to compliance, including the following:
- The franchisee’s duty to pay a percentage of audit costs if there is underreported revenue found
- The length of time a franchisee must retain financial and business records
You can also outline terms related to training to ensure compliance with the brand’s operational procedures and quality control guidelines:
- The number of days the franchisee has after signing the contract to open the franchise
- The number of days of training the franchisor will provide
- The number of people who can attend the training
Getting Business Equipment
Depending on the franchisor’s methods, they can use an equipment lease agreement or an equipment bill of sale to transfer the necessary equipment to the franchisee.
7. Insurance
Provide the minimum amount of insurance that the franchisee must maintain to cover injury or property damage related to the business. You can also state the number of months of business interruption insurance coverage that the franchisee must maintain.
8. Transfer Details
The franchisee may decide they don’t want to operate the franchise for as long as stated in the agreement. If they want to transfer the franchise, the agreement can cover a transfer fee for conveying the franchise to a new owner.
When transferring a franchise to a new owner, you may benefit from the following documents:
- Lease assignment agreement. To legally transfer the physical storefront to the new operator.
- Partnership interest assignment agreement. To document the transfer of equity or ownership stakes within the business entity.
- Business bill of sale. To formalize the purchase of equipment, inventory, and other physical assets.
How to Get Out of a Franchise Agreement
A franchise agreement can include a termination-for-cause clause. This can allow the franchisor to terminate the contract if the franchisee violates important terms, provided the franchisor issues the agreed-upon advance notice.
9. Trademark Information
List the trademark information used by the franchise, including the following:
- Main brand or trademark
- Registered trademark
- Service mark or logo
- Standard website format/domain structure
A franchisee setting up a website for their franchise can enter into a web development retainer agreement with a web developer. The web developer can help create a strategic website that complies with the franchisor’s requirements.
Use Legal Templates’s licensing agreement to help monitor the use of a franchisor’s trademarks and other IP. If you want to transfer ownership of a trademark, use a trademark assignment agreement.
10. Governing Law & Dispute Resolution
Name the state whose laws will govern your franchise agreement. Discuss where disputes will be handled so that the franchise can operate with minimal interruptions.
Franchise Agreement Sample
View an example of a franchise agreement below to see how to structure yours. Then, create your own using Legal Templates’s guided questionnaire. It will help you add custom details, from your franchise setup to approved locations and term lengths. Download the final contract in PDF or Word format to keep in your records and distribute to your franchisees.
