What Is a Franchise Contract?

Before planning for expansion and contractual franchising, it is pivotal to understand what a franchise is first. The franchise is a license agreement between two parties—the franchisor and the franchisee. The franchisor owns the company’s rights or trademarks; thus, such a person is responsible for allowing the franchisees or people allowed to access the business services, plans, and trademarks. And, franchisees get to use the company’s name. When both parties form a mutual agreement wherein the franchisee continues to have that licensed privilege, a binding contract takes place. This legally binding contract between franchisees and franchisors is called the franchise contract.

Did you know that there are approximately 773,603 franchises in the US back in 2019?

According to Statista, around 30% of the American businesses opening their franchise choose the fast-food sector.

On the other hand, the Census surveyed in 2016 that 7.7 million businesses in the US had at least one employee that gets paid to work.


What Makes the Franchise Contract Important?

Franchising is your solution to expanding a business, whether it is a global or a regional franchise agreement only. But why is its contract important, you might ask? Easy. Contracts are enforceable by law. When one party fails to exhibit the stipulations under the franchise contract, legal consequences eventually follow. Protecting one’s business is extremely crucial since having a business means your enterprise’s success either goes up or down. With a contract, the franchisor’s rights get protected in case a franchisee somehow manages to betray the owner. Moreover, written agreements contain the 411 of the contractual duration, terms, conditions, business plans, and so much more.

Franchise Contract: Pros and Cons

You already know that franchises under a business contract are vital to enterprises, especially in building a larger brand. Next, you discover the benefits and the downside of such a topic too. You expect such advantages if the contract was made carefully and that each party plays their role appropriately. Even so, you would notice disadvantages if poorly executed. So working hard is essential to keep the contract advantageous on your part no matter what. Without further ado, these are the pros and cons of a franchise contract:


A franchise’s well-known advantage will be its hassle-free business operation. Remember that you need not make a new company or brand through franchising since ready-made plans and services are given by the franchisor already. Franchisees no longer create the entire management plan since a franchisor sends them the instructions. Aside from plans, the products to sell, company uniform, and even logos are part of the deal already. Franchisees may receive help from financial planning and training programs as well to ensure that they comply with the requirements given by the franchisor.


Just like any business, a few drawbacks can happen. An example is how franchisees must pay for a royalty payment regularly. Since the franchisor helped from employment, financing, management, and various services, the franchisee should provide something in return. Consequently, this return is in the form of a particular revenue percentage. A franchisor’s earnings may reach from four to eight percent depending on what got stipulated in the document. Albeit an ongoing payment is a hassle, a franchisee can always strive by finding other ways to earn bigger, like an advantageous business location, smart marketing plans, or a new management program.

What Makes Up a Franchise Contract?

Based on the Business Journals, a 2016 Census survey estimated that nearly 7.7 million US establishments have at least one paid worker. With already a lot of American businesses, franchising brings a bigger chance of increasing that percentage. How much more if it is on an international scale rather than the US alone? But, hold your horses for the moment. Are you ready for a franchise? Follow-up question, do you even know what elements to find inside a franchise contract? You identify those elements first to become more prepared in a contractual agreement soon. Take a look at what makes up a franchise contract:

Grant of License: Any franchise contract should at least have formal approval from the franchisor that a franchisee is allowed to hold business operations and sales. That statement is under the grant of a license, and it also contains basic information of each party for identification purposes. Indeed, franchisors offer assistance and approval to franchisees, but meeting certain requirements is required.Franchisor Provisions: What services and provisions do franchisors offer towards every franchisee? You incorporate those in this section. Will the business provide support for training, marketing, merchandising, or any other form of assistance? To ensure you will not forget any essential detail to enumerate, you use a checklist until everything important gets included.License Fee and Royalty: The franchisee commits to ongoing costs for the franchisee as a royalty fee. The Federal Trade Commission (FTC) even mentioned that such payments are part of standard franchise agreements. Therefore, the contract should specify the amount until the franchisee makes sure to pay regularly. Besides the amount, the payment plan includes the schedule as well. Setting deadlines makes it clear when a franchisor has a right to take action if ever no royalty was received during the deadline.Dispute and Termination Terms: Business agreements must have plans for dispute resolution or any breach of contract. For example, franchisees might only give less than the stipulated percentage for royalty. Or worse, a franchisee might go AWOL. If anybody fails to adhere to the obligations, then how to manage penalties must happen. Such penalties get determined via the contract terms. With continuous penalties committed, termination may be the endgame for the party that committed those.

How to Formulate a Standard Franchise Contract

You learned from Statista that the business franchises in the US reached up to 773,603 in 2019. Behind those successful franchises are well-thought-out contracts. Such contracts inhibit the responsibility of keeping business operations intact and continuous as franchisors grant the franchisees in opening a franchise. The question is, how do you process an acceptable franchise contract? These are the steps that help you formulate it:

Step 1: Download Your Preferred Franchise Contract Template

There is no need to start at the very beginning with a blank document because things get easier with a template prepared for your franchise contract already. Pick the appropriate franchise contract template, and you have a lot to choose from too. After this, you receive the leeway to customize it according to preference. Make the most out of your template by adjusting format, adding more content, and filling in the details.

Step 2: State the Introduction or Preamble

With your template, you begin with an introductory statement. You may do that in a preamble as well. What makes the whole introduction important is to inform early about what the entire franchise contract is about. Introductions enable parties to be reminded of the business’s role or nature. What matters most is that this part leaves an impression immediately that the said contract refers to franchising. Thus, people no longer err the document as a wedding contract, cleaning contract, or any other type.

Step 3: Recognize the Parties and Grant of License

Of course, it is no stranger that knowing the parties is always part of a contract. Who are the franchisor and the franchisee in the first place? Their names, contact details, and other essential information need to be evident in the form. The same goes for defining their relationship in case one party is unsure about how his or her role affects the other. Furthermore, a formal declaration of the license agreement is a must. This declaration confirms that the licensing of every trademark, logo, obligation, or anything from the brand commences.

Step 4: Incorporate the Provisions and Payment Details

You state the rights and obligations next. What does the franchisor provide anyway? Expound the provisions thoroughly until everything gets understood easily. Moreover, dealing with the business budget is still necessary. A franchisee needs assurance on the royalty fees first before agreeing to anything. An effective contract would provide the royalty cost computation to prepare franchisees with their budget. Even so, you finalize the fee percentage and monthly gross income.

Step 5: Clarify the Contract Duration

Contracts eventually come to an end. The average franchise contract may even reach for about ten or twenty years. The dates of when the franchise starts and ends need evidence here. However, you may keep a franchise as a never-ending process if franchisees keep up with the renewal fee and extension agreement. A franchisor has the right to approve for renewal anyway to keep a long-lasting service. More about duration, it also applies to payment deadlines, tax filing dates, and more. Same as before, parties should be timely to prevent incoming consequences.

Step 6: Do Not Forget the Governing Law

Legally binding agreements like contracts should abide by federal and state laws. You involve the governing law since any business must comply with legal requirements anyway. If anyone breaks any rule, then the fair action to conduct is by giving out consequences. It would be unjust to leave the one who complied to suffer while the party that disobeyed could simply get away with it. Once you sign a contract, that means you agree to every stipulation, rule, or clause found inside. If you are unsure of your decision, then it is wise to consult with a lawyer to help you explain further what the agreement entails. Lastly, the protection of interests for each party needs discussion to promote lesser conflict.


Can I get out from a franchise contract?

Indeed, you can walk away from a franchise contract. But, you must follow the agreement about what happens regarding termination, breach of contract, or any dispute. How that takes place would vary according to the document’s content. If you agreed to the contract, then you surely have read and understood how getting out happens. The same goes for knowing what you lose from it.

Can a franchise fee by a one-time payment process?

Yes, the franchise may be paid for a single time. As long as the contract stated that the initial franchise fee is a one-time payment only, then that assures you.

Am I allowed to negotiate in a franchise contract?

Typically, negotiations are acceptable because you can always discuss that with the franchisor. However, keeping the game fair should be thought of by any franchisee. Maybe only one party benefits from the whole agreement, and that is no longer sustainable.

Franchising sure makes it possible to have the franchisor’s services and ideas shared with franchisees that can adapt the owner’s business model. Also, dreaming big like becoming as iconic as Starbucks is possible by forming an agreement between parties and a strategic plan. Trials and errors may take over too. Yet, you always remember that you are your brand. What matters is how you continue to rise back up and slowly receive the chance of expanding your business on a local, regional, national, or global scale. But you take the baby steps first by finalizing a detailed and well-managed franchise contract.