You waited for the perfect time to start looking for a business. There is one you have had your eye on for quite some time, and you think you are ready to dive in.
You know the business is a franchise, and you researched what that entails. However, did you delve into the wording in the franchise agreement? Can you decipher the legal terminology?
What is a franchise agreement?
The franchise agreement is a legally binding contract between the franchisor and franchisee. It outlines the obligations of both parties. The Federal Trade Commission regulates the buying and selling of franchises in the United States under the Franchise Disclosure Rule, 16 CFR 436.
What are the elements?
The following list includes some, but not all, of the basic elements of a franchise agreement, in addition to points such as advertising, insurance requirements and record-keeping:
- An overview – This gives the necessary information, such as those involved in the contract and those parties’ obligations.
- Fees – As a franchisee, you may pay an initial fee to start the business and another to continue the business. There may be other fees as well that could go towards marketing or other purposes.
- Territory – Territory is not the physical site of your business but the area and boundaries where you can operate it. The agreement must define the territory. The franchisor may grant you “exclusive territory,” which will protect you from other franchisees.
- Intellectual property – The agreement will define the use of IP such as trademarks and patents. The franchisor retains the right to change these.
- Franchise disclosure agreement – Before you sign the agreement, you should receive a Franchise Disclosure Document. The FTC’s Franchise Rule requires franchisors to give a prospective franchisee information on the business’s fees, territory, trademarks, financial statements and other items of disclosure.
Although the FTC requires the FDD to be easy to understand, for any parts that are still not clear, an attorney may be able to help explain them to you.