A franchise agreement sets out the contractual relationship between a franchisor and franchisee. It deserves a careful reading alongside the Franchise Disclosure Document, or FDD. Use the topics below to organize questions for your attorney rather than assuming that every agreement provides the same rights or support.
Distinguish the disclosure from the contract
The FDD provides disclosures about the offer; the agreement sets contractual terms. Under 16 CFR 436.5, Item 22 includes proposed agreements. Item 19 may include financial performance representations, but such representations are not mandatory. An FDD should not be described as necessarily providing earnings information.
Make sure your review covers the documents you would actually sign, including exhibits, addenda and any related guarantees or other agreements. Note where one document refers to another and ask your attorney to explain how they work together.
Brand rights and operating standards
Identify the rights you would receive to use the brand and system, the duration of those rights and the restrictions attached to them. Read the provisions about approved goods and services, suppliers, premises, reporting and operational standards.
For your practical review, write down which decisions you would control and which would require approval. Ask how changes to system standards could affect the work and resources needed to operate the business.
Fees and payment obligations
Locate each payment obligation and its calculation, timing and conditions. Consider the initial fee separately from continuing royalties, advertising contributions, technology charges and other applicable costs. Read definitions and cross-references rather than relying only on a headline percentage.
Create a list of questions about amounts, minimums, payment methods and any charges that could change. Have your advisers connect those provisions to the proposed operating budget.
Territory and competition
Do not assume that buying a franchise grants an exclusive geographic market. The FTC’s franchise buyer guide explains that even a protected territory may leave other forms of competition available to the franchisor. Compare the actual territory provisions with the offer’s marketing description.
Ask what the boundaries mean for finding customers, opening another location and serving customers through different channels. Record the explanation next to the relevant contract provision so your attorney can evaluate it.
Training, assistance and your responsibilities
Separate specific support commitments from assistance the franchisor may choose to provide. Ask who participates in training, what completion requires and which costs fall to you. Compare those commitments with the tasks you would need to perform at opening and afterward.
A useful illustration is our Assisted Living Locators model review, which distinguishes listed training commitments from optional corporate lead referrals. Apply that distinction to the actual documents for your own candidate.
Renewal, transfer and the end of the relationship
Read how the agreement addresses its term, renewal, termination and a proposed sale or transfer. The FTC guide identifies these as important subjects summarized in FDD Item 17. Renewal and the ability to sell should not be treated as unconditional rights.
Ask your attorney about the practical implications of notice requirements, approvals, fees and continuing obligations. Include any restrictive covenants in that review, with attention to the applicable law and circumstances rather than a blanket statement about enforceability.
Disputes and independent legal review
Locate any provisions about arbitration, mediation, courts, venue and governing law. Ask what they could mean if a disagreement arises. An attorney can explain the proposed terms and advise whether to request changes; neither representation nor negotiation guarantees that the franchisor will agree to different terms.
Keep a written list of unresolved questions and obtain clarification before committing. Combine contract review with research into the actual business and conversations with current and former operators. Clearer documents and better information support a decision; they do not ensure a successful investment.