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Critical Documents: Franchise Disclosure Document (FDD)

The Franchise Agreement is a formal and binding document that marks a pivotal inflection point in the process.

So you’re through researching, evaluating, and validating potential franchisors and have made the decision to move forward. It’s perfectly normal to have some anxiety when it comes time to sign on the dotted line. Rest assured, a good franchise agreement can be your best friend.

Every franchise company has a standard franchise agreement which states what the franchisor expects from you and what is allowed. Generally, larger more established companies will present longer agreements and be less willing to negotiate the terms of the agreement.

The purpose of a contract as it applies to franchising in the broadest sense is to:

  1. Describe the costs associated with being awarded a franchise

  2. Explain the issues regarding physical property, such as the location, building, equipment and supplies

  3. Define the operating practices which protect the entire franchise system

  4. Identify your protected territory

The rules of the relationship are carefully constructed to make sure each franchisee has an equal opportunity for success and that the brand name of the franchise is protected. Having a protected territory spelled out guarantees you that your franchise won’t be competing with another sister franchise on the next street. The size of your territory, however, is one item that can occasionally be negotiated in a contract. So, if that is a concern for you, be sure to ask.

Other items you are generally addressed in a franchise agreement:

  • What exactly is covered in the initial franchise fee

  • Whether the franchise fee includes an initial inventory of products and supplies

  • If the franchisor will provide continuing inventory

  • The degree of control the franchisor will exert over franchise identity and product quality

  • If continued training and assistance will be provided by the franchisor

  • Whether advertising will be local or national and if the cost will be shared

  • How royalties are calculated and paid

  • What will be the bookkeeping, accounting and reporting requirements

Remember, just because a franchise agreement is valuable to you doesn’t mean you should sign it without question. Go over each and every provision carefully and be sure you understand why each item has been included and how it will affect you. A good franchisor will spend whatever time necessary helping you to become comfortable with the contract.

Most importantly, don’t let the complexity of a franchise agreement rob you of the excitement of launching your business. This is a thrilling time and a good franchise agreement is just your assurance of getting a fair and equal chance at success. By protecting the franchise brand name and good will, the franchise agreement protects you as well.

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