Franchise Agreements: Understand This Important Business Step

As you near the final steps of your franchise selection and licensing process, you’ll be presented with a few documents. One of these is the franchise agreement—one of the most important documents to review and sign before embarking on your franchise journey.

A franchise agreement is a legal document that finalizes your franchise license. It outlines the relationship between you (the franchisee) and the franchisor. In your eagerness to get your franchise up and running, you might be tempted to rush through the franchise agreement stage. However, it’s crucial that you take time to review this document before signing, so you know what awaits you once you start your business.

Franchise agreement vs. franchise disclosure document

One of the most common points of confusion for franchisees lies in the differences between the franchise agreement and the franchise disclosure document. Although these documents are very important and should each be reviewed carefully, they are different in many ways.

A franchise disclosure document (FDD) is an informational document the franchisor is legally obligated to provide you. This document includes a wealth of information about the franchise, its financial information and specific information about your territory and resources available to you. Potential franchisees are expected to review the FDD before making their final decision.

The franchise agreement, on the other hand, is the legally binding document you and the franchisor sign when you’re ready to buy into the franchise. This agreement usually lasts between five and 25 years and is not easily broken before its terms end.

Inside the franchise agreement, you’ll find many provisions, including a final fee schedule, franchise obligations and restrictions on how you operate your business. It also grants you permission to use the company’s trademark and resources in specific ways for the duration of the contract. Essentially, it documents everything you and the franchisor are legally required to follow as part of your business relationship.

Why franchise agreements are important to your success

Reading your franchise agreement in full ensures that you know exactly what you are getting into when you decide to invest in a franchise opportunity. If you don’t pay close attention to the details of the agreement, you might be surprised to have missed something important. Even worse, you might accidently violate the terms of your agreement, landing you in financial or legal trouble.

The franchise agreement you sign gives specific instructions on what you are allowed and required to do with your franchise business. You need to have a solid understanding of these things in order to adhere to the contract. If you stray from the approved uses of the company’s resources or offerings, you might violate the contract.

It also outlines the fees you’ll owe to the franchisor and when those fees are due. You must understand the details of this fee schedule to create your business’s financial plan and make sure you pay your dues on time.

Finally, you might be able to negotiate some of the terms in the franchise agreement, such as your territory. Paying attention to these details may give you an opportunity to get better terms or extra assistance from the franchisor.

Under no circumstances should you sign a franchise agreement without developing a solid understanding of the agreement. By giving both the FDD and your franchise agreement time and attention (and perhaps a review with a knowledgeable franchise lawyer), you can enter into a franchise business feeling confident about your expectations and potential for success.

Are you interested in investing in a franchise and starting your own business? When it’s time to sign on the dotted line, Tenet Financial Group is here to help connect you with fast financing options. Contact us today to learn more!