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Provisions to Look for in a Franchise Agreement


Investing in owning and operating a franchise is requires a great investment of energy, time and  money. Therefore, it is essential to carefully review the operating document, the franchise agreement, prior to entering into the contract. Many provisions will impact the ability to operate the franchise business successfully. Other provisions will determine the type of protection there will be available in the event that a dispute arises between the franchisee and franchisor. Below are some particular areas to pay special attention to in negotiating the franchise agreement.

Define the Sale Item or Service

Ensure that that the agreement describes in detail, exactly what it is that will be provided, whether it is a service or product. In this way, you can avoid misunderstandings about what is being sold so that you are comfortable that you can actually handle the entire package of franchised products and services, in addition to the varied new and improved versions as needed over time.

Party Obligations

Specify the particular franchisor's obligations to include at least the ability to provide support to the franchisee. Fees paid should be detailed so that there is written assurance for fair value of the amount received. The franchisee obligations should be imparted so that there is a clear idea of exactly what is required. If the franchisor reserves rights to make future changes, they should be subject to a "reasonableness" covenant.

"Early Out" Provision

Form franchise agreements usually don't have an "early out" provision, but it is a good idea to include it so that if dramatic changes in the franchisor/franchisee relationship occur, both parties are covered adequately.

Dispute Resolution

In the event that a dispute arises, a fair and quick dispute resolution procedure is preferable over a lawsuit. Lawsuits entail much more time, money and frustration than a dispute resolution service. An arbitration venue is most preferable. Be wary of any provisions that disclaim statutory protection.

Right to Sell or Transfer

A provision detailing the right to sell or transfer the business is always advisable. This includes ensuring that if the business is sold, you may continue to earn a living in that arena.

Same Brand Competition Protection

Ensure that the agreement provides same-brand competition protection. This is important so that if you will be investing a great deal of your savings and dedicating yourself, that a level of responsibility for building a product or service demand in the area is shared by both parties.

Demand and Duration

It is only right and logical that if you do an adequate job of building demand for products or services in the trade area, you should be allowed to continue to represent that product or service exclusively there. In the alternative, you should have notice of any deficiencies so that they may be addressed.

Fair Compensation and Related Products

Financial obligations should be detailed in the franchise agreement. Ensure that the obligations will allow for a decent living if you do a good job and work hard. You may also want to ensure that you can sell complimentary products and services if there is no binding agreement to be exclusive.

Good Faith and Fair Dealing

Ensure that an honest, fair and good faith non-discriminatory agreement clause exists for both parties.

It is rare that franchise agreement covers everything, however, the above are some basic, and sometimes overlooked clauses that any legal counsel will most likely consider prudent. Franchise law can be tricky. For a complete agreement, you can also obtain a franchise agreement sample from a reputable attorney form resource.

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