What To Look For Before You Sign A Franchise Agreement

Quick Summary

A franchise agreement is one of the longest and most binding contracts most small business owners will ever sign. The Franchise Disclosure Document, the FDD, runs hundreds of pages. The franchise agreement itself is a separate, heavily one-sided contract. And almost nothing in it is negotiable in the traditional sense. Franchisors use standard-form contracts, and most will tell you straight: take it or leave it.

1. Territory Rights, And What “Exclusive” Actually Means

Franchise agreements frequently grant territory rights, but the definition of those rights varies. An “exclusive territory” sounds protective, but exclusivity may only apply to physical storefronts, not to online sales, mobile units, or other channels the franchisor controls.

Read the territorial definition carefully. If your agreement says you have an exclusive territory for “traditional locations,” find out exactly what that excludes. Franchisors have faced litigation over whether digital channels or non-traditional formats compete with franchisees’ territories. Also look at what happens to your territory if you underperform. Some agreements allow the franchisor to shrink your territory or add a competing unit if you miss certain sales benchmarks.

2. The Renewal Clause, And What You Give Up To Stay

Most franchise agreements are for ten years, with renewal rights. But renewal is rarely automatic, and the terms for renewal may be substantially different from the original agreement.

Check whether renewal requires you to sign the then-current version of the franchise agreement, meaning the franchisor’s updated terms, not the ones you originally agreed to. This is standard practice. On renewal, you may face higher royalties, different territory terms, or new requirements that weren’t part of your original deal. Also look at fees associated with renewal and whether you’re required to remodel or upgrade your location at renewal time.

3. Royalty Structure And Marketing Fees

Standard royalties in franchise agreements run between four and twelve percent of gross revenue, depending on the system. Marketing or advertising fund contributions add another one to four percent. These numbers are in the FDD, but the details of how the marketing fund is spent, and who controls it, are in the franchise agreement.

Ask: who controls the marketing fund? What are franchisees entitled to see in terms of fund accounting? Can the franchisor divert marketing contributions to national campaigns that don’t benefit your local Atlanta market? These are not hypothetical questions, they have been the basis of class-action franchisee litigation.

4. Transfer Rights, And What It Costs To Sell

At some point you may want to sell your franchise. Transfer provisions govern that process and in most situations require franchisor approval of the buyer. What’s worth scrutinizing is the franchisor’s right of first refusal and the transfer fee.

Some agreements give the franchisor the right to match any offer you receive before you can sell to a third party. Others charge a transfer fee of $10,000 to $30,000 or more. The new buyer in most situations must meet the franchisor’s then-current qualifications, go through training, and sign the then-current agreement. Understanding your exit options before you enter matters. A business you can’t sell without significant friction carries a built-in risk factor.

5. What You’re Personally Liable For

Most franchise agreements require a personal guarantee. That means if the business fails, you are personally on the hook for ongoing royalties, lease obligations the franchisor co-signed, and potentially other liabilities.

Read the personal guarantee provisions carefully. Are there any limitations on the guarantee? What events trigger personal liability? If you’re signing as an LLC or corporation, check whether the personal guarantee effectively voids your entity’s liability protection for purposes of the franchise relationship. This is standard, but knowing exactly what you’re personally guaranteeing is non-negotiable before you sign.

6. Default And Termination Provisions

Franchise agreements in most situations give the franchisor the right to terminate for a long list of reasons, some that require notice and a cure period, and some that allow immediate termination.

Look at what constitutes an incurable default. Missing a royalty payment once? Failing to meet sales benchmarks for one quarter? Receiving a health department violation? The termination triggers matter because termination in most situations means you lose the business, the brand, the revenue stream, and you may still owe the franchisor under post-termination obligations.

Also look at what happens after termination. Non-compete provisions in franchise agreements can prevent you from opening a competing business in your area for years after the franchise ends. In Georgia, franchise non-competes are in most situations enforceable if they meet reasonableness standards.

Getting The Review Right

The Franchise Disclosure Document and the franchise agreement are designed by the franchisor’s legal team to protect the franchisor. That doesn’t make them unfair by default, it means you need someone on your side reading the same documents.

MacGregor Lyon Business Attorneys helps Atlanta business owners evaluate franchise agreements before signing, identifying the terms that create the most risk before they become a business contract problem and making sure you understand what you’re committing to over the life of the agreement.

Schedule a free consultation. Call (404) 688-5964.