Several years ago, we published a popular three-part guide titled, Understanding Your Franchisor’s FDD. As its name suggests, this guide provides an in-depth look at what franchisees need to know about their franchisor’s Franchise Disclosure Document (FDD). Now, we’re taking the same approach to the franchise agreement. In this three-part series, franchise lawyer Jeffrey M. Goldstein breaks down 15 key contract provisions that govern most franchise relationships.
1. Grant of Franchise Rights
One of the first provisions, if not the first provision, in most franchise agreements addresses the grant of franchise rights to the franchisee. While it may seem fairly obvious that you are receiving a grant of rights (after all, that’s the whole point), it is important to make sure this section of your franchise agreement is clearly written and does not leave any room to question your rights as a franchisee.
2. Franchise Territory
If you are receiving a franchise territory, the territory provision is an extremely important clause in your franchise agreement. You will want to make sure this clause clearly and correctly outlines your exclusive rights (assuming your territory is supposed to be exclusive), and you will want to make sure the franchisor’s reservation of rights does not effectively eviscerate your territorial protections.
3. Opening Deadline
Many franchisors include an opening deadline in their franchise agreement. If you do not meet this deadline, you could lose your franchise without ever opening for business. Although these provisions are generally intended to ensure that franchisees are diligent about getting their businesses up and running (so they can start paying royalties), franchisors will use them aggressively in some cases. With this in mind, before you sign your franchise agreement, you should make sure you are reasonably confident that you will be able to open on time.
4. Lease Approval, Design and Build-Out
For franchises that involve leasing a retail space, franchise agreements will typically include provisions regarding lease approval, design and build-out. Here, franchisees must be careful to ensure that their franchisors’ approval rights do not put them at risk for failing to meet their opening deadline. In many cases, franchisees will need to negotiate provisions making clear that their obligation to open on time is conditioned upon the franchisor’s issuance of timely approvals.
5. Initial Term
The “Initial Term” is the duration of time you have the right to operate your franchise—as long as you do not default under your franchise agreement. While this clause should be fairly straightforward, you will want to make sure the Initial Term aligns with what was disclosed in the FDD, and you will want to examine any conditions regarding renewal and termination. We will cover these conditions in Parts 2 and 3 of this series.
Contact Franchise Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchise, it is important to have a lawyer carefully review your franchise agreement. Franchise lawyer Jeffrey M. Goldstein has been helping prospective and active franchisees protect themselves for more than 30 years. To learn about our fixed-fee franchise business review packages for prospective franchisees, call 202-293-3947 or contact us online today.
