Understanding Your Franchise Agreement is our three-part series covering 15 key provisions of the franchise agreement for prospective franchisees. As a franchise law firm, we have represented clients considering all types of franchises, and we have reviewed franchise agreements from franchisors in every segment of the industry. Part 1 of the series covered five key provisions at the beginning of the franchise agreement. Here in Part 2, we cover franchise fees, operating standards and renewal.
6. Initial Franchise Fee
The initial franchise fee is an upfront one-time fee you pay for the right to purchase the franchise. The fee stated in the franchise agreement should be the same as the fee disclosed in Item 5 of the Franchise Disclosure Document (FDD). If you will be financing any portion of the initial franchise fee through your franchisor, the financing terms should be clearly stated in the franchise agreement as well.
7. Royalty and Advertising Fees
Different franchisors charge different royalties and advertising fees. Some franchisors charge a percentage fee (i.e. three percent of gross sales), while others charge a flat monthly fee. Some franchisors also impose minimum monthly royalties (i.e. three percent of gross sales, but at least $500 per month). The royalty and advertising fees in your franchise agreement should match the franchisor’s Item 6 disclosures, and your franchise agreement should clearly specify the method of calculation, due date and means of payment.
8. Other Fees
In addition to your initial franchise fee, royalty and advertising fee, the franchise agreement will also state any other fees you will owe the franchisor. You will want to make sure you identify all fees contained in the franchise agreement, when they apply and when you have to pay.
9. Operating Standards and the Operations Manual
Some franchisors go to great lengths to specify operating standards in their franchise agreements. Others simply reference the franchisor’s Operations Manual. In either case, the Operations Manual is likely to be “incorporated” into the franchise agreement, which means that the Operations Manual is legally binding just like the terms stated directly in the agreement.
Crucially, most franchisors will reserve the right to modify their operating standards and Operations Manuals from time to time. This means that you won’t necessarily know the standards you need to meet throughout the duration of your franchise. While this isn’t fair, it is something you will generally have to accept as a franchisee. However, you may be able to negotiate certain protections, such as a cap on the capital expenditures you must incur in order to comply with system changes.
As a franchisee, your right to renew is extremely important. Oftentimes, franchisees will need a renewal term in order to recoup their initial investment and become profitable. Franchise agreements typically include a list of conditions for renewal, including curing any defaults, paying a renewal fee and signing the franchisor’s “then-current” franchise agreement.
Contact Goldstein Law Firm | A Franchise Law Firm Exclusively Representing Franchisees
If you are thinking about buying a franchise, it will be important for you to engage a franchise law firm to thoroughly review your franchise agreement. To inquire about our fixed-fee franchise business review programs, call 202-293-3947 or get in touch online today.