How Do Franchise Agreements Work?

Before becoming a franchisee in the franchise business of your choice, you will be expected to sign a franchise agreement. However, it is essential to your franchise businesses potential success that you understand what a franchise agreement is and how they work, so in this article, we will fully cover how franchise agreements work and other things you need to consider before signing the dotted line.


What is a franchise agreement?

The franchise agreement is your contract with the franchisor. It outlines the terms and conditions of the franchise business for both parties franchisor and the franchisee. This should contain how the franchisee is expected to run the franchise business in the chosen location. It will also usually let the franchisee know the general parameters they need to follow when running the franchise.


If you are unsure of anything highlighted in the franchise agreement as a prospective franchisee, its best to seek legal advice from a professional to give you a better understanding of your franchise agreement since it is essential you understand all the duties you need to fulfill as a new franchisee to ensure you do not break the rules of the franchisor and damage your franchise business in the process.


Also, in this agreement, each party, franchisor, and franchisee should understand their roles and expectations as to what they have to deliver as a franchisor and what the franchisee has to do to follow the proven system set up by the franchisor.


Why franchise agreements are needed

Franchise agreements are essential because this way, as a franchisee and franchisor, you have a level of safety as a franchise agreement should explain what you can expect from the franchisor and also what is expected from you, the franchisee running the day-to-day operations of the chosen franchise business this allows both parties to have full transparency which is crucial especially as a new franchisee or franchisor alike.


Remember, a good franchise agreement should explain what is expected from you as the new franchisee and what is expected from the franchisor. If you have any other questions, you would like to ask your franchisor before signing the dotted line. We recommend you check out our previous article listing all the most important questions to ask your franchisor as a new franchisee.


Things you can expect to see in a franchise agreement

Before signing a franchise agreement, there are several different fields you can expect to receive in the document. You should look out for a few things before signing the dotted line, these include:


  • Fees – You must know how much the franchise location costs and the ongoing fees you are expected to pay as a franchisee to ensure you have the capital to fund your franchise business. If you would like to learn more about the types of fees you are expected to pay as a franchisee, please refer to our guide on the various costs involved in buying a franchise.


  • Length of your contract – Another thing to look out for in your franchise agreement is the standard length of the contract. For example, if the standard contract for your franchise location is five years, you need to decide whether you want to run this type of business in five years and, most importantly, do you have the passion? If not, it is best to look for another franchise opportunity if you feel this one is not sustainable for you.


  • Exit plan – A franchise agreement should contain the exit plan of a franchise location. For example, most franchisors will sell the location as a franchise resale as an exit plan for the franchisee, and the franchisee will receive some of the funds received through selling that location for their years of hard work and building a customer base in their local community ready for the new franchisee to take advantage of.



Now that you know how important the franchise agreement is to a franchise businesses potential success, it is essential that you only sign that dotted line if you are confident. Suppose you have read this article and need clarification on something listed in your franchise agreement with your specific franchise. It’s best to talk to your franchisor or seek legal advice from a professional to help you solve any queries you may have about your franchise agreement.

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