How to Understand a Franchise Agreement

Can you understand your Franchise Agreement?

Unless you are or were associated with the legal profession in the past, the answer to the first question is probably a resounding, "No!" That's why you had an attorney to look it over and explain it to you.

Now, however, for some reason, you are perusing the document again, and you're not sure you remember everything you and the attorney discussed. You know that it was clear enough the first time he explained it that you felt comfortable signing the agreement, but now you're needing to look at some portions of it again.

So, now you're faced with the second question. But, surprisingly, the answer to that one can be a confident, "Yes!" because we're going to take each part of a standard franchise agreement and break it down.

There will be differences in every franchise agreement, so some things covered in this article may not be in your agreement, and we may not cover some things that do appear in your agreement. For those situations, you will need to contact your franchise attorney again.

Franchise agreements may be divided into Chapters and Articles, or they may use other terms to express changes in subject matter. For purposes of this article, we are going to refer to subject topics as Chapters and Articles.

The title page will most likely be the first chapter. The top portion will consist of identifying information on the franchisor and franchisee, and possibly the territory in which the franchise operates. From there, the body of the title page will define the type of business and will re-state the business name.

The rest of the paragraphs will most likely spell out different items that concern both the franchisor and franchisee. These can include such things as recognition of the advantages of the franchise, the importance of maintaining the franchise's reputation, and other things.

Article numbers will delineate different topics that fall under the subject matter addressed by Chapter 1. If necessary, subsections will be used (example: Article 1.01, Article 1.02, etc.).

Article topics may include License and System, with subheadings such as License Grant, Location and Territory, or similar titles. Each section will deal with matters pertinent to the section's title.

For instance, the License Grant section will explain whether or not the license to operate the franchise is exclusive or non-exclusive, and will state for how long the License Grant is applicable. From there, this and other sections may pertain to matters involving location and territory, as well as other information.

One section, in Article 1 or another article, will define the meaning of the term "licensed business" and will explain again the type of service provided by the business. Subsequent sections, which may immediately follow the one which introduces the subject matter pertaining to "licensed business" will outline the franchisor's rights and privileges in regards to that particular topic, as well as the responsibilities of the franchisee.

An article in the franchise agreement, along with its relevant subsections, will address the franchise fee(s) and advertising. The amount of the initial fee, royalty fees, national marketing fee, and any other applicable fees, and when each fee is to be paid, is included, as well as information on how or whether those fees will be used for advertising expenditures.

A section in the franchise fee article, or another article itself may be included explaining when, where, and how a grand opening will be held for the new franchise.
At least one article and its subsections will deal with business records and reports, which ones are necessary, penalties for failure to make such reports, and audit and inspection rights of the franchisor.

Articles covering training, trade secrets and/or confidentiality issues, the franchisee's pre-opening obligations (these may also deal with real estate issues) and other issues pertaining to the operation of the franchise may have also been included.

Use the article titles and subsection headings to find the one that you think fits your particular situation, and isolate that section by either copying the page(s) and highlighting the material or printing off that section only, if the document is in pdf or a similar format. Then, take time to read it carefully, making notes as you do so.

If you are still unsure of your position or responsibility as a franchisee, or still have questions, or if your situation was not covered in this article, then by all means consult with a franchise attorney. You may have to pay a consultation fee, but it is better to spend a little now than run the risk of having to spend a lot later.

Ask a FranFinders franchise consultant to recommend a franchise attorney to assist you.