Becoming a franchisee can be a great way to start a business but it’s important to make sure you read the fine print before committing to anything. Seasoned contract law attorneys can help you understand your obligations under a franchising agreement and advise you on the best course of action to ensure your rights are protected.
What Is A Franchise Agreement?
A franchise agreement is a legally binding contract that lays out the terms of the arrangement between you and a prospective franchisor. Franchise agreements are usually valid for 5-10 years with an optional renewal clause. It’s vital to seek the counsel of experienced business lawyers who are well-versed in handling franchising contracts, as a lengthy commitment like this can box you in for many years and the manner in which your business is run is often at the discretion of the franchisor.
Common Elements of a Franchise Agreement
Fees and Royalties: The agreement should lay out any up-front fees you will be required to pay. It must also clearly state the amounts of any ongoing royalty payments and marketing fund contributions.
Build Out: Many franchise agreements include an estimate of the required expenditure for building out a physical location and other expenses such as signage.
Territory: The agreement should define the terms of your geographical territory and outline whether it is shared or exclusive.
Supplies: This section usually provides the specifics on how supplies are provided to the franchise and supply costs the franchisee may be responsible for.
Insurance: Most franchisors require that a franchisee acquire certain types and amounts of liability insurance.
Right of Inspection: Many franchisors reserve the right to inspect your premises and other aspects of the business at any time.
Non-compete Clause/Confidentiality: A non-compete clause prohibits franchisees from starting a similar business if they quit the franchise. You will also be obligated to keep details about the franchise and its operations confidential during your time of ownership and after departure.
Termination: If you or the franchisor chooses not to renew your contract, the agreement should clarify what happens after termination. Depending on the type of business, these terms will vary but often include first right of refusal, which means that the franchisor has the right to buy the business back from you before you sell it to a third party. The franchisor may also reserve the right to repossess equipment and supplies. This is one of the most vital elements of a franchise agreement, so have your attorney goes over it with a fine-tooth-comb is essential to ensure your rights are protected should the agreement be terminated.
Most franchises have an operations manual that dictates how the business must be run from day-to-day. Franchisors usually reserve the right to amend the operations manual at their discretion, so it is good idea to have your attorney review this as well.
If you’re considering purchasing a franchise, our business lawyers in West Chester provide top-notch legal counsel that ensures all your legal bases are covered.