Elements of a Franchise Agreement

Some people explore owning a business by buying into a franchise, rather than building something from the ground up.  A franchise is a business owned and operated by an individual (the franchisee) under a larger company’s branding, systems, and controls (the franchisor).  The franchisee pays for the right to use the brand and business model, subject to the terms of a legal contract called a franchise agreement.

The franchisors draw up these agreements, which are often lengthy, detailed, and less negotiable. They are designed to protect the franchisor’s brand and replicate its business model, but they can be complex and create long-term obligations for the franchisee.  Below are some of the key components to watch for when reviewing a franchise agreement:

Grant of Franchise

The grant of a franchise is the foundation of a franchise agreement. This section outlines the rights and responsibilities of the franchisee. Some examples include:

• Franchise rights: These include brand usage, which is the right to operate a business using its brand name, trademarks, and proprietary systems. They also include territorial rights, which refer to exclusive rights to operate within a specific geographic area.
• Operations procedures: This includes Standard Operating Procedures (SOPs), which are detailed instructions on how to run daily operations.

Marketing support, advertising support, and intellectual property rights are included.

Quality Standards

Maintaining high-quality standards is essential for a franchise’s success. Consistency helps build brand reputation, ensuring customer satisfaction and loyalty. It helps build trust, which leads to repeat business. Key elements include:

• Approved suppliers.
• Approved advertising methods.
• Hours of operation.
• Pricing guidelines.
• Customer service standards.
• Product/service quality control.

Financial Obligations

Understanding the financial obligations outlined in a franchise agreement is essential. This section details all the costs associated with owning and operating a franchise. You must know how this will impact your cash flow and overall profitability. Key elements include:

• Initial franchise fees.
• Ongoing royalty payments.
• Advertising fund contributions.
• Operational costs.
• Financial performance representations.
• Additional fees.

Contract Duration

The contract duration and renewal terms section outlines the length of time you are permitted to operate the franchise and how you can renew the agreement. Understanding these terms is crucial for long-term planning. Key elements include:

• Contract length.
• Renewal conditions.
• Renegotiation clauses.
• Non-renewal consequences.
• Transferability during renewal.
• Performance-based renewals.
• Performance metrics.

Termination Clauses

Termination clauses should not be ignored because they outline the conditions under which either party can terminate the contract. Understanding these provisions is essential for knowing your rights and obligations if the business relationship ends prematurely. Key elements include:

• Grounds for termination
• Notice requirements
• Cure period
• Immediate termination conditions
• Post-termination obligations
• Financial settlements
• Dispute resolution mechanisms

Get Trusted Legal Guidance Before You Sign

Franchise agreements often have long-term commitments, strict rules, and complex financial terms that heavily favor the franchisor. Before entering any binding contract, it’s critical to understand your rights and obligations fully.

At Brown Dunning Walker Fein Drusch PC, our Colorado business law attorneys help prospective franchisees make informed decisions by thoroughly reviewing agreements and offering strategic advice tailored to your goals. Contact us online or call (303) 329-3363 today to schedule your consultation.