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10 Key Provisions of Franchise Agreements

The franchise agreement is the legal document that governs the franchisee/franchisor relationship. The franchise agreement should not be confused with the Franchise Disclosure Document (FDD), which the Federal Trade Commission (FTC) requires all franchisors to provide to potential franchise buyers. A sample of the franchise agreement is included in a franchise company's FDD.

There is no standard format for a franchise agreement because the terms and conditions and operations vary from franchise to franchise and industry to industry. In general, franchise agreements cover certain key provisions.

10 main provisions of franchise agreements

1. Training and/or ongoing support provided by the franchisor

Each franchisor has its own training program for franchisees and their staff, which can include training done at the franchisee's location or at the corporate headquarters or a combination. Most franchisors offer ongoing support, including administrative and technical support.

2. Assigned territory

Your franchise agreement will designate the territory in which you will operate and whether or not you have exclusivity rights.

3. Duration of the franchise agreement

This provision states the length of the agreement.

4. Franchise fee and total anticipated investment

Franchisees are required to pay an initial franchise fee that grants them the right to use the franchisor's trademark and operating system.

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5. Trademark, patent, and signage use

This provision covers how a franchisee can use the franchisor's trademark, patent, and signage.

6. Royalties and other fees you are expected to pay

Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, typically on a monthly basis.

7. Advertising

The franchisor will reveal its advertising commitment and what fees franchisees are required to pay towards those costs.

8. Operating protocol

This section details how franchisees run their outlets.

9. Renewal rights and franchisee termination/cancellation policies

These provisions deal with how the franchise can be renewed or terminated. Some franchisors have an arbitration clause in the franchise agreement, which means that if legal action on either side is warranted, an arbitrator will review the case instead of going to court.

10. Resale rights

Some franchisors allow franchisees to sell their franchises for whatever reason. Many, however, write in buy back or right of first refusal clauses, which allow the franchisor to buy back the franchise at a rate determined by them or to match any potential buyer's offer who has expressed interest in buying your franchise.