What are franchise agreements and what’s inside them?

What are typical franchise agreement clauses? 

Some typical franchise agreement clauses include, but are not limited to: 

• Fees: Franchise fees, royalties and other fees the franchisee must pay to the franchisor.  
• Territory: Geographic restrictions on the proximity of the location to other franchised businesses within the franchise system (and potentially company owned stores).  
• Training and operations: The type of training provided for the franchisee and the training that the franchisee will be responsible for delivering (e.g., to front line staff and managers).  
• Marketing: The franchisor’s and franchise’s roles and obligations around marketing including fees paid by the franchisee. 
• Renewal: The process to extend the term of the franchise agreement beyond the current term and the required conditions to renew the term. 
• Performance standards: Minimum requirements or targets the franchisee needs to achieve.  
• Termination: What will occur if the franchise agreement is cancelled by the franchisor (e.g., process, procedures, restrictions on competition)?  
• Dispute resolution: If a dispute arises, where (franchisors or franchisee’s location) and how will it be resolved (arbitration, mediation, litigation).

What to look out for when reviewing a franchise agreement 

Reviewing a franchise agreement is complex and requires specialized knowledge of franchise law.  As a prospective franchisee, you should fully understand the roles and responsibility of the franchisor and the franchisee as established by this agreement and that you fully understand the legal obligations that you will be taking on by signing the franchise agreement.   

For example, you will want to be fully aware of your obligations with respect to site selection, remodeling/renovations both upfront and upon renewal, relocation, and any other monetary obligations.  Are the expectations reasonable, typical, and what level of support can you expect from the franchisors? In some cases, it may be advisable to negotiate more favourable terms to certain clauses in the franchise agreement if it entails unnecessary or unreasonable risk or future liability.   

Five areas where franchisees frequently encounter issues include:  

• Personal guarantee: Are the terms of the personal guarantee reasonable? Most franchisors will require a personal guarantee. The franchisee will be personally required to guarantee the obligations of their corporation under the franchise agreement.  By providing a personal guarantee, a franchisee will be risking not only their significant financial investment in the business, but also any personal assets that they may own.   
• Territorial exclusivity: Does the franchise agreement offer any territorial exclusivity?  Many large franchisors do not, but some do.  If it is offered, does it come with any significant caveats or limitations (e.g., the franchisor’s ability to operate in various forms in within the territory). 
• Non-competition and other restrictive covenants: Franchise agreements typically contain several restrictive covenants (such as non-competition and non-solicitation) that will significantly restrict the franchisee’s ability to operate a competing business for a period of time post termination or expiration.  Are these reasonable and enforceable? 
• Transfer and renewal conditions: Often these clauses put conditions on a franchisee’s right to resell their franchised business in the future.  For example, they may require the selling franchisee to renovate the premises.   
• Rights upon termination: The franchise agreement may give the franchisor rights to take over the assets of the franchised business and control the lease and premises. This may pose significant legal and business risk in the future for a franchisee. 

Conclusion 

As a prospective franchisee, you should read the franchise agreement carefully and be aware of the rights, responsibilities, and legal obligations you have under the franchise agreement, as well as potential risks and liabilities.  

It is wise to have an experienced franchise lawyer who is knowledgeable and experienced in franchise law in your province review and assess the franchise agreement before you sign it.  The franchise lawyer assess the legal strength of any concerning clauses, help you negotiate terms to meaningfully improve your financial investment and protect yourself in the event of a dispute down the road.   

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This article is provided for general information purposes only and is not intended to provide legal advice.  Prospective franchisees should obtain legal advice from a knowledgeable franchise lawyer.

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