Business Law

Franchise Agreements

Are you one of the millions of American small business owners who started with a franchise? Or, are you thinking of buying a franchise for the first time? Regardless, once the franchise business is up and running there are numerous things you have to keep in mind during the day-to-day operations and when making various business decisions--how to grow the business, how to get more customers, etc.

For the most part, your operations, as the "franchisee," are governed by the franchise agreement you signed with the "franchisor" (the person or company that sold you the franchise). Depending on the franchisor or the type of franchise business, the franchise agreement can control everything from the color of the curtains in your store front windows to where your shop can be located.

The Agreement

Franchise agreements can vary significantly. How they're written depends largely upon the type of franchise being bought and sold. For example, a franchise for a hair salon will have different provisions than one for a hamburger restaurant, simply because they're completely different businesses.

Also, many states have specific and detailed laws on franchises in general and what can and can't be included in franchise agreements.

Nevertheless, there are some provisions you'll find in just about every franchise agreement that will have a direct impact on how you run your business, such as:

Royalty payments. These are payments that you usually have to make periodically to the franchisor, and the amount of the payment is typically based on your weekly or monthly gross income from sales of the franchisor's product or service. Paying such fees, of course, has a direct impact on your ability to make a meaningful profit.

Site selection. Often, the franchisor will either choose where your business will be located, or it will require you to get its approval for a site you select. So, if you ever feel the need to move or relocate your business, your choices might be limited, or the process might be more complicated due to the franchisor's involvement.

Design and appearance. It's not uncommon for the franchisor to require your shop to look the same as its other franchises. This can cover things like the shape and color of the building, the style and color of the table cloths, store signs, and employee uniforms. You have to follow these rules in order to keep the franchise.

What you sell. You may not have control over the goods or services you're able to sell, which can impact your ability to grow the business and increase profits. Obviously, the franchisor doesn't want you to sell a competitor's goods, but the restriction also helps to make sure that the franchise name and goods remain identifiable by the public. For example, a hamburger restaurant franchisor might not want you sell tacos and other Mexican-style food because it could indicate to the public that the franchisor is getting out of the hamburger business or that the public is no longer pleased with its hamburgers.

Daily operations. Some franchise agreements will specify things like what hours you have to be open, the prices that you have to charge customers, who you have to buy supplies from and getting the franchisor's approval for any advertising you undertake on your own, all of which can reduce your ability to increase sales and profits, and maybe your ability to pay royalties.

Sales or market area. The franchisor usually agrees to make sure that another franchise doesn't compete with you (and vice versa) by restricting your business to a specific geographic area. In addition, the franchise agreement might bar you from maintaining a Web site for your franchise, but at the same time, the franchisor might have a Web site that offers goods to customers in your area. The point is, you lose some control over your operation and access to potential customers.

Advertising. Often, the franchise agreement will require that you contribute to an advertising fund. Frequently, the franchisor uses the fund for advertising the franchise name and product nationwide, rather than promoting your particular shop in your particular area. But, you still might benefit from the ads. Either way, however, it's more money that you have to pay to the franchisor.

Insurance. Generally, you're required to get and maintain any insurance for the business that's specified in the agreement, including insurance against loss by fire and natural disaster, and liability coverage for any injuries suffered by consumers while on the franchise's premises. Often, the franchise agreement specifies the amounts of the insurance you must carry.

Terminations and renewal. Franchise agreements are for a fixed term of years; they don't run forever. In some states, a franchisor can't end or terminate your franchise agreement before it expires unless there is good cause, such as your failure to make required royalty payments. Once it expires, the franchisor can, but is not required to, offer you a renewal, which can be completely different from the original agreement: royalty payments could go up or your sales territory could be reduced, any of which can have a devastating impact on your business.

Things to Keep in Mind

As you can see, practically every business judgment you'll have to make as a franchisee-small business owner is impacted by the franchise agreement. And, if you don't follow the agreement's requirements, you could lose your franchise and your investment. So, when making decisions on how to run your business, be certain to keep the franchise agreement in mind and read it carefully. And, if you have any questions about if and how the franchise agreement affects your decisions, contact an experienced business law attorney.

Questions for Your Attorney

  • If I don't like some of the terms and conditions of a franchise agreement, is there any room to negotiate with the franchisor? Can you negotiate the franchise agreement for me?
  • My franchisor has informed me that it's going to raise my royalty fees. Can it do that?
  • My franchisor claims that I'm not doing enough business in my area, and so it's going to sell another franchise nearby. What can I do to stop it?
  • I built and own the building where my gas station franchise does business. Can I let my son open a small souvenir stand in my building?
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