
How to Read a Franchise Agreement: 10 Critical Clauses You Must Know - Introduction
A franchise agreement is not just a contract—it is the ultimate rulebook for your business journey. It dictates what you can do, what you cannot do, and what happens if things do not go as planned. Yet, thousands of franchisees sign these agreements without fully understanding the implications.
Many of them end up feeling trapped, financially drained, and legally powerless—not because franchising is a bad business model, but because they did not carefully examine the contract before signing.
This article will ensure you do not make the same mistake.
This is a deep dive into the ten most critical clauses in a franchise agreement. Each one of these clauses has played a major role in franchise disputes, lawsuits, and financial failures. Understanding how to read a franchise agreement is not optional—it is necessary.
Why Franchise Agreements Are So Complicated (And Why You Must Read Them Like a Lawyer)
A franchise agreement is a legally binding document that outlines the rights and responsibilities of both the franchisee and the franchisor.
There are three major challenges with these contracts:
Franchise agreements are written by the franchisor’s legal team, meaning they are designed to favor the franchisor.
They are dense, technical, and full of legal jargon, so a single misunderstood sentence can lead to serious financial losses.
Most franchisees do not have a lawyer review the agreement before signing, which means they may unknowingly give up critical rights.
To avoid these pitfalls, it is crucial to analyze the ten most powerful clauses in the franchise agreement before signing.
10 Critical Clauses in a Franchise Agreement You Must Understand
1. The Franchise Fee and Ongoing Royalties Clause – The Cost You Will Keep Paying
A franchise agreement requires an upfront franchise fee, but the real financial commitment comes from ongoing royalties. These fees typically include:
A fixed monthly fee, regardless of how much revenue you generate.
A percentage of revenue, often ranging between four to twelve percent.
Additional fees for marketing, technology, and operations.
What to check:
Can the franchisor increase royalty fees over time?
Are there additional hidden fees that are not clearly mentioned?
Do you have to pay royalties even if your business is losing money?
Real Example:
Many Subway franchisees struggled because their royalty fees remained fixed even when their sales declined, forcing them to operate at a loss.
2. The Territory Clause – Are You Protected from Competition?
This clause defines whether you have exclusive rights to operate in a specific area or if the franchisor can open competing locations nearby.
Common pitfalls:
No territorial protection, meaning the franchisor can open another franchise or corporate store in close proximity.
Vague definitions of territory, where phrases like "market size may be adjusted at franchisor’s discretion" leave franchisees without real protection.
Online sales that cut into local franchisee revenue, with no clear terms on revenue sharing.
Real Example:
McDonald’s franchisees do not receive protected territories, which means another franchise location or corporate store can open right next door.
3. The Term and Renewal Clause – Will You Still Own Your Business in 10 Years?
Most franchise agreements last between five and twenty years, but few franchisees realize that they do not automatically have the right to renew.
Key risks:
The franchisor can refuse renewal without providing a reason.
Renewal often comes with new contract terms, which may not be negotiable.
Franchisees may be required to pay renewal fees, even if they have already invested heavily in the business.
Real Example:
In 2018, Tim Hortons franchisees protested when the company forced them to accept higher fees and tighter controls in order to renew their agreements.
4. The Exit Clause – How Hard is it to Get Out?
Many franchisees assume they can leave the franchise if things do not work out, but franchise agreements are often structured to make this extremely difficult.
What to check:
Are there penalties for exiting early?
Does the franchisor control the sale of your franchise?
Are you required to pay royalties for the remainder of your contract, even if you close your business?
Real Example:
Burger King blocked a franchisee from selling their locations, forcing them into bankruptcy instead of allowing them to exit the franchise system profitably.
5. The Advertising and Marketing Clause – Are You Paying for Something You Cannot Control?
Franchisors often charge franchisees a marketing fee, typically ranging from one to four percent of revenue. The problem is that franchisees usually have no say in how this money is spent.
Potential problems:
The franchisor may allocate funds to national campaigns that do not help individual franchise locations.
Some franchisors do not provide transparency on where marketing funds go.
Franchisees may be restricted from running their own promotions without corporate approval.
Real Example:
In 2019, McDonald’s franchisees protested when corporate advertising fees were used for campaigns that did not increase sales at their locations.
6. The Operating Standards Clause – How Much Control Does the Franchisor Have?
Every franchise agreement includes detailed requirements about how franchisees must operate their business, covering:
Store design and layout.
Supplier restrictions and approved vendors.
Hiring and employee management policies.
What to check:
Can you switch suppliers if you find a better deal, or are you locked into buying from franchisor-approved vendors?
Can the franchisor update operating standards at any time, even if it increases costs for franchisees?
Are there consequences for failing to meet brand standards?
7. The Training and Support Clause – What Do You Actually Get?
Most franchises promise training and ongoing support, but the level of assistance can vary significantly.
Questions to ask:
Is training in-person or online?
Does the franchisor provide ongoing support beyond the initial launch?
What additional fees, if any, are required for extra training?
8. The Non-Compete Clause – Can You Work in the Same Industry After You Leave?
Most franchise agreements include a non-compete clause that restricts franchisees from starting or working for a competing business after leaving the franchise.
Key points to check:
How long does the non-compete period last?
Does it apply to a specific location or an entire industry?
Are you prohibited from working for another franchise brand in the same sector?
9. The Legal Dispute Clause – How Are Conflicts Resolved?
Franchise agreements specify how legal disputes will be handled. Many agreements require franchisees to resolve disputes through arbitration rather than in court.
What to check:
Is arbitration mandatory, and does it favor the franchisor?
Are franchisees required to cover their own legal costs?
Is the franchisor allowed to change dispute resolution terms over time?
10. The Supplier Restrictions Clause – Are You Forced to Buy from Approved Vendors?
Some franchisors require franchisees to purchase all products and supplies from approved vendors, often at higher prices than they could get elsewhere.
Real Example:
Subway franchisees have long complained that they are forced to buy ingredients from suppliers that charge more than competitive market rates.
Final Thought: Never Sign a Franchise Agreement Without Fully Understanding It
A franchise agreement is not just a business contract—it is a detailed document that determines how your financial future will unfold.
Before signing, make sure you:
Consult a franchise lawyer.
Negotiate where possible.
Speak with existing franchisees about their experiences.
Read every clause carefully and ask questions.
Understanding these clauses is not just important—it is essential for protecting your investment and ensuring long-term success in franchising.
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