Franchise Agreement Checklist: What to Review Before Buying In
Why Franchise Agreements Deserve Intense Scrutiny
A franchise agreement is one of the most consequential contracts you may ever sign. It governs your business operations for years (often 10-20) and includes fees, restrictions, and obligations that can make or break your investment. The franchisor's lawyers drafted the agreement — you need to understand every term.
Fees and Financial Obligations
- What is the initial franchise fee, and is it refundable under any circumstances?
- What is the ongoing royalty (typically 4-8% of gross revenue)?
- Are there advertising fund contributions (commonly 1-3% of gross revenue)?
- Are there technology fees, training fees, or other recurring charges?
- What is the total estimated initial investment, and does it match Item 7 of the FDD (Franchise Disclosure Document)?
Territory Rights
- Do you get an exclusive territory? What are its boundaries?
- Can the franchisor sell online or through other channels into your territory?
- Can the franchisor open company-owned locations in your territory?
- What happens if another franchisee encroaches on your area?
Operational Requirements
- What operating standards must you follow? (Hours, menu/products, pricing, suppliers)
- Must you purchase supplies from approved vendors only? Are prices competitive?
- What training requirements exist, and who pays for ongoing training?
- How much operational freedom do you have versus following the franchisor's system exactly?
Term, Renewal, and Exit
- What is the initial term (typically 10-20 years)?
- What are the renewal conditions? Must you pay a renewal fee, renovate, or sign a new agreement with different terms?
- What are your exit options if the business does not work out?
- Can you sell or transfer the franchise? What approval rights does the franchisor have?
- Does the franchisor have a right of first refusal if you find a buyer?
Termination
- What can the franchisor terminate you for, and is there a cure period?
- What post-termination restrictions apply? (Non-compete, non-solicitation)
- What happens to your equipment, inventory, and lease after termination?
When to Consult a Lawyer
Always have a franchise attorney review the agreement and the Franchise Disclosure Document before signing. Franchise law is specialized, and the investment at stake justifies professional review.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.