Franchise Agreements: Key Terms and What They Mean

Understanding Franchise Agreements with a Franchise Lawyer

Entering a franchise agreement is an exciting but complex process for franchisors and franchisees. A well-drafted franchise agreement, prepared with the assistance of an experienced franchise lawyer, is essential for clearly defining the rights and obligations of both parties and setting the foundation for a successful, long-term business relationship. In this post, we’ll break down some critical terms in typical franchise agreements and discuss why working with a knowledgeable franchise attorney is crucial when preparing or reviewing these contracts.

Holon Law Partners has 100+ years of combined experience guiding clients through complex cases and legal intricacies. Our empathetic, customized, and client-centered approach focuses on you and your unique business needs. To schedule a consultation, call our team at  (866) 372-0726 or email us at info@holonlaw.com. 

Franchise Fee and Royalties

The franchise fee and ongoing royalty payments are two of any franchise agreement’s most important financial terms. The franchise fee is the upfront cost the franchisee pays to the franchisor for the right to operate under the franchise brand and business model. This one-time fee can range from tens to hundreds of thousands of dollars, depending on the franchise. Royalties are ongoing payments, usually calculated as a percentage of the franchisee’s revenue, that compensate the franchisor for the continued use of the brand, systems, and support. Having a franchise agreements lawyer review these fee provisions is crucial to ensure they are fair and clearly defined.

Territory Rights

The territory rights provision specifies the geographic area where the franchisee can operate. This critical section prevents the franchisor from allowing other franchisees to open competing locations within the defined territory. However, some franchise agreements carve out exceptions, such as for “non-traditional” locations like airports or stadiums. There may also be minimum performance requirements the franchisee must meet to maintain exclusivity within their territory. A franchise agreements attorney can help negotiate territory terms that adequately protect the franchisee’s market area.

Training and Support Obligations

Most franchise agreements include a section detailing the initial and ongoing training and support the franchisor will provide to the franchisee. This often covers site selection assistance, equipment and inventory purchasing, employee training, operating manuals and proprietary software systems access, and ongoing advice from franchise field support staff. What’s included and any associated costs should be spelled out. A business and corporate lawyer can ensure these support obligations are robust enough to justify the franchise investment.

Renewal Rights

Franchise agreements are usually for a defined initial term, often 10-20 years, with conditional rights to renew at the end of that period. Renewal is typically contingent on the franchisee being in good standing, signing the then-current form of the franchise agreement, which may have materially different terms, and paying a renewal fee. Franchisees need to pay close attention to the renewal provisions, preferably with the advice of a franchise attorney, as the right to renew is essential for realizing a long-term return on their initial franchise investment.

Transfer and Assignment

Franchise agreements usually significantly restrict the franchisee’s ability to transfer or assign their rights under the agreement to another party. Most agreements require the franchisor’s express written consent for any transfer, and the franchisor has broad discretion to reject proposed transferees. There are often exceptions for transfers to family members or internal business restructurings. The agreement should also address what happens upon the death or permanent disability of the franchisee. Corporate lawyers can advise negotiating transfer terms that provide reasonable franchisor oversight while preserving adequate flexibility for the franchisee.

Protecting Your Interests with a Franchise Attorney

Franchise agreements are lengthy, complex legal contracts that can be challenging for franchisees to understand without the assistance of an experienced franchise lawyer. While the franchisor’s interests will be well-protected by the agreement their attorneys have drafted, franchisees need their legal counsel to review the contract, explain their rights and obligations, and negotiate any changes necessary to protect their interests. 

Some of the other vital terms a business lawyer will focus on when reviewing a franchise agreement include:

• Advertising fund contributions and use 

• Insurance requirements

• Covenants not to compete during and after the term

• Guarantees and personal liability of individual owners

• Grounds and process for termination and repurchase

• Dispute resolution and venue provisions

• Adherence to system standards and the franchisor’s right to make changes

Investing in a franchise is a significant decision that warrants proper legal guidance every step of the way. While it’s exciting to join a recognized brand and proven business model, franchisees should first have it thoroughly reviewed by a franchise lawyer before signing a franchise agreement. A skilled attorney will ensure you understand exactly what you’re committing to and help negotiate a deal that provides the foundation for a profitable, enduring franchise relationship.

Frequently Asked Questions

1. How much does a franchise lawyer or attorney typically charge to review a franchise agreement?

The cost for a franchise agreements lawyer to review a franchise contract varies based on the length and complexity of the agreement, but most experienced attorneys charge between $1500-5000. While this may seem expensive, it’s a wise investment compared to the long-term costs of signing an unfavorable agreement.

2. Do I need a local lawyer near me, or can I hire a franchise attorney anywhere in the USA?

Thanks to modern technology, you can usually work with a franchise lawyer anywhere in the country. Most franchisors have a standard agreement they use nationwide, so hiring an attorney experienced in franchise law is more important than one located nearby. However, if the contract specifies that disputes will be governed by local state law, you may want to engage a franchise lawyer in that state.

3. The franchise salesperson told me the franchise agreement is non-negotiable. Is it still worth having a franchise lawyer review it?

Absolutely. While many franchisors are reluctant to negotiate changes to their “standard” contract, an experienced franchise attorney can still provide valuable guidance on the most important provisions and how to request reasonable amendments. The franchisor may agree to modify specific terms, especially for multi-unit or well-capitalized franchisees. And even if they won’t negotiate, a legal review will help you understand exactly what you’re signing.\

4. How do I find a suitable franchise agreements lawyer to advise me?

Look for an attorney or law firm skilled in franchise law and has experience representing franchisees. Ask for recommendations from other franchisees or check legal directories. Most franchise lawyers offer a free consultation, so contact several and ask about their experience, fees, and approach before hiring one.

5. I’m an experienced business owner. Do I still need a franchise attorney to review my agreement?

Even sophisticated businesspeople can benefit from the advice of a skilled franchise lawyer. Franchise agreements are unique legal contracts with industry-specific terminology and issues. A franchise attorney can leverage their experience to identify critical risks and help you negotiate a better deal. They can also help you understand how the franchise agreement relates to and impacts other aspects of your business structure and operations.

Work with a Franchise Lawyer

Carefully reviewing and negotiating the franchise agreement with the assistance of an experienced franchise lawyer is one of the most critical steps a franchisee can take to improve their chances of long-term success. While the excitement and momentum of the franchise sales process can make it tempting to sign the agreement and get started as soon as possible, investing the time and money in competent legal counsel is well worth it. A skilled franchise attorney will ensure you understand your rights and obligations and help you secure an agreement that provides the foundation for a profitable, enduring franchise business.

Holon Law Partners has 100+ years of combined experience guiding clients through complex cases and legal intricacies. Our empathetic, customized, and client-centered approach focuses on you and your unique business needs. To schedule a consultation with us, call our team at  (866) 372-0726 or email us at: info@holonlaw.com.