A franchise agreement is a license that allows a franchisee to operate a business using the franchisor's brand, systems, and support. It's one of the most complex business contracts — heavily regulated by the FTC and state law.
Before you sign: the FDD
Every franchisor must provide a Franchise Disclosure Document (FDD) at least 14 days before signing or paying anything. The FDD contains:
- Item 19 — financial performance representations (if the franchisor makes them).
- Item 7 — initial investment range (total cost to open).
- Item 20 — franchisee turnover, closures, and transfers.
- Item 21 — audited financial statements.
Never sign a franchise agreement without reading the entire FDD. The 14-day waiting period exists because franchise sales are high-pressure by nature.
Key terms
- Franchise fee — the upfront cost for the license (typically $20K–$50K).
- Royalties — ongoing fees (typically 4–8% of gross sales, paid monthly).
- Marketing fund — mandatory contribution to brand advertising (typically 1–4% of gross sales).
- Territory — exclusive or non-exclusive. An exclusive territory protects you from competition by other franchisees.
- Term and renewal — typically 10–20 years with renewal options. Check what happens at renewal (fees, conditions, renegotiation).
Franchisee obligations
- Operating standards — the franchisor controls hours, staffing, supplier selection, and menu/product offerings.
- Reporting — monthly financial statements, sales reports, and compliance audits.
- Training — mandatory initial and ongoing training programs.
- Insurance — specific coverage requirements set by the franchisor.
Termination and transfer
- Termination for cause — the franchisor can terminate for breach, non-payment, or failure to meet standards.
- Post-termination obligations — you must stop using the brand, remove signage, and may face non-compete restrictions.
- Transfer restrictions — selling your franchise requires franchisor approval. They typically have a right of first refusal.
Make it legal
- Both parties sign.
- The franchisee acknowledges receiving the FDD.
- Keep copies of the FDD, agreement, and all amendments.
A franchise agreement is highly specialized. Consult with a franchise attorney before signing.