A franchise agreement is, at its core, a codified relationship between a franchisor and a franchisee. Franchise agreements work by articulating the terms of this relationship, detailing the expectations of both sides and laying out the conditions that must be met for that relationship to function productively. Although there are many quality franchise opportunities available, finding the one that is right for you can be a challenge. But the franchise agreement can provide important insight into how the franchise company operates and what kind of relationship it intends to have with you and each of its other franchisees.
Definition of Franchise Agreement
By definition, a franchise agreement is an agreement between a franchisor and a franchisee, one that has information disclosures that are regulated by the U.S. Federal Trade Commission (FTC). Typically, franchise agreements outline the obligations of both parties, including the franchisor’s terms and the conditions by which you as a franchisee agree to abide. The franchise agreement also gives you a license to sell the company’s proprietary product or service, a brand name, and a support system, but only in accordance with the processes the company already has in place.
Franchise Agreement Terms
Although the exact terms and content of a franchise agreement can vary widely depending on the franchise and the state with jurisdiction over the franchisor, the way that a franchise agreement works is usually fairly consistent. Under the FTC’s Franchise Rule, any potential franchisee must receive a Franchise Disclosure Document a minimum of 14 days before signing a franchise agreement. The purpose of this rule is to give you time to carefully investigate the franchise opportunity, including the terms of the franchise agreement, a sample of which is usually included as an exhibit.
Franchise agreements with a top-branded company typically offer little or no room for negotiation. While this may seem a bit strict, a non-negotiable franchise agreement is actually a good sign, an indication of a strong franchise company. These companies have learned the value of standardization, which only works when each franchisee must adhere to the same standards.
This expectation begins with the franchise agreement. This agreement is often unilateral, designed to protect the integrity of the franchise, its brand, and the franchisees’ businesses as a whole. A confident franchise company believes it knows best when it comes to doing so, resulting in an agreement that resists changes. In fact, a franchisor’s willingness to negotiate on even core provisions of the agreement should raise serious red flags about the company’s level of certainty about its own brand and system. Because of the way that a franchising relationship works, if the franchisor runs into difficulties, those problems will certainly have a negative effect on your business. A franchise company that believes in itself will see no need to negotiate with you on terms that are consistently producing successful results.
At the same time, however, a well-crafted franchise agreement should balance the needs of the franchisor with those of franchisees who may need modifications to accommodate certain situations. Franchise agreements work best when they can both protect the franchisor’s brand and systems and ensure consistency in the day-to-day operations of each franchise, as well as support you and each of their franchisees in your efforts to manage a business of your own.
Ultimately, making a franchise agreement work for you involves placing your trust in the franchisor’s brand and systems. Many franchise agreements are intended to last 10 years, with some extending to 20 years and beyond. But yours may not stand the test of time unless you have a clear understanding of what a franchise agreement is designed to do and how it works.
If you are looking for a franchise opportunity that is consistently rated among the best available, consider all that a Real Property Management franchise has to offer. Our comprehensive training and ongoing business support have helped hundreds of investors like you build businesses that thrive in a growing rental market.