Franchise agreements

Business Formation

Read the disclosure document before the excitement sets in.

Federal rules require a franchisor to provide a franchise disclosure document, and to give you at least fourteen days with it before you sign anything or pay anything. That waiting period exists for a reason. The FDD contains the litigation history, the turnover of franchisees, the real cost of opening, and the financial performance representations — or the conspicuous absence of them.

What we look at in the FDD

• Item 3 — litigation. A pattern of suits against franchisees tells you how this relationship is managed when it goes wrong.
• Item 7 — estimated initial investment. Compare it with what the salesperson said, and add working capital for the months before revenue.
• Item 12 — territory. Whether it is exclusive, whether the franchisor can sell online or through other channels into your area, and what protects it.
• Item 19 — financial performance. If there is no representation, nobody is promising you will earn anything, whatever you were told verbally.
• Item 20 — outlets. The tables showing how many franchisees left the system, and why.
• Item 21 — audited financials of the franchisor itself, which is who you are depending on.

The agreement terms that bite later

Required suppliers and mandated purchases. Advertising fund contributions with no obligation to spend them in your market. Renovation and technology requirements imposed mid-term. Personal guarantees, which put your house behind the business. Post-termination non-competes and the franchisor's option to buy your assets at a formula price. Transfer restrictions and approval rights when you eventually want to sell. And dispute resolution clauses that require arbitration in the franchisor's home state.

What the franchisor controls once you sign

• Operations. A detailed manual you agree to follow, which can be revised during the term — meaning obligations you did not read at signing.
• Quality control. Inspections, audits and standards, with consequences for failing them.
• Branding and signage. What the premises must look like, and who pays when the brand is refreshed.
• Product sourcing. Required suppliers and mandated purchases, sometimes from the franchisor itself.
• Social media and digital brand usage. What you may post, what domains and handles you may hold, and what happens to them when the relationship ends.

Intellectual property, term and renewal

You are licensed to use the marks, the proprietary processes and the trade secrets — you do not own them, and the agreement will say precisely what happens to them at termination. The initial term is commonly around a decade, with renewal options that carry their own fees and conditions, and often a requirement to sign the then-current agreement rather than yours. Training costs are usually yours as well, including for staff hired later.

What goes wrong

• Territories that turn out to be non-exclusive, with another franchisee opening nearby.
• Loss of rights in the brand assets, domains and customer lists at termination.
• Breach-of-contract claims from either direction, over standards, reporting or payment.
• Financial losses for both parties when a location underperforms and the obligations continue.
• Regulatory violations where disclosure or registration requirements were not met.

What we do

Review the disclosure document and the agreement before you sign, and tell you plainly which terms are unusual and which are standard. Revise outdated agreements for franchisors. Identify the clauses that are easy to miss and expensive to discover — personal guarantees, transfer restrictions, post-termination covenants and dispute resolution provisions. And advise on enforcement and termination when a relationship is not working.

What is negotiable

Less than you would like and more than they suggest. Development schedules, territory definitions, personal guarantee scope, transfer provisions on death or disability, and cure periods are all things franchisors have agreed to modify — particularly for multi-unit deals and experienced operators. The answer is always no if nobody asks.

Common questions