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Franchise agreements can feel intimidating. They’re long legal documents full of technical jargon that can make your head spin. On top of that, the language can seem stilted to protect the franchisor while leaving you out in the cold. But in practice, these agreements aren’t nearly as intimidating as they may seem.
As someone who has looked at thousands of these agreements and has walked hundreds of candidates through this process, I wanted to provide a clear, no-frills breakdown of the most important elements of the franchise agreement. Because at its core, a franchise agreement is a license agreement between you and the franchisor.
Below, I break down several essential elements of the franchise agreement so you can approach the discovery process with a clear understanding of what the final franchise agreement will entail.
Basics and overview
Off the bat, you’ll notice a franchise agreement starts with the basics: the parties (you and the franchisor) as well as a brief overview of the brand/concept that you will be running. By the time you are considering signing a franchise agreement, this section will be well-covered ground.
Financial requirements
In this section, there are three key categories: the initial franchise fee, the ongoing royalties and marketing fees, and additional costs. The initial franchise fee is a one-time upfront lump sum that gives you the rights to use the brand itself. The ongoing royalties and marketing fees are the fees that are associated with the daily profits and running of your business. Both the initial franchise fee and the royalties/marketing fees are expected across all franchises. That said, not all franchises are created equal so it’s important to closely review what these fees entail to ensure they are supporting your business appropriately.
Lastly, you’ve got additional costs. As vague as this sounds, it’s really more dependent on the type of business you are running. For example, if you are opening a boutique fitness brand, then additional costs might include build-out items like treadmills, bikes, pilates machines, etc. These are costs that wouldn’t be necessary, for example, in a service brand that doesn’t have customer-facing real estate (think home services).
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