Understanding Small Business Franchise Agreements

Small business owners often consider franchising as a way to expand their business. Franchising is an effective way to multiply a business and is a method that is becoming increasingly popular. When one opens a franchise, they enjoy a ready-made business model, established branding, access to a larger customer pool, support, and training. However, before one signs any small business franchise agreements, one must understand the legal agreement.

In this post, we will help small business owners to understand the ins and outs of small business franchise agreements. We will walk through what they are, what should be included in a franchise agreement for a small business, the different types of agreements, and things one should look for before signing a franchise agreement.

What Is a Small Business Franchise Agreement?

First of all, what is a small business franchise agreement? It is a legal contract that outlines the relationship between a franchisor and a franchisee. A franchisor is the company that owns the business, and a franchisee is an entrepreneur who buys the rights to operate the business under the company’s name.

A franchise agreement is a legally binding document that specifies the obligations of both the franchisor and the franchisee. It covers issues such as marketing, training, territory protection, fees, and intellectual property. Before one signs a franchise agreement, it is important to understand what is expected of both parties.

Types of Small Business Franchise Agreements

When it comes to franchise agreements, there are two types: product distribution agreements and business format franchise agreements.

Product distribution agreements grant the franchisee the exclusive right to sell the franchisor’s products in a particular area, but allows the franchisee to continue to do business under his or her own business name. On the other hand, the business format franchise agreement grants the franchisee the right to use the franchisor’s name and operating system.

What Should Be Included in a Small Business Franchise Agreement?

Before one can sign a small business franchise agreement, they must ensure that it includes adequate information. Here are some common elements it should have.

  • Products and services: The agreement should outline the products and services that the franchisee is authorized to sell.
  • Operating system: The agreement should detail the operating system that the franchisee must follow.
  • Territory: The agreement should specify the franchisee’s territory and the franchisor’s rights within it.
  • Fees: The agreement should outline the fees that the franchisee must pay, including initial fees and ongoing royalties.
  • Marketing: The agreement should describe the franchisor’s responsibilities regarding advertising and promotional activities.
  • Training: The agreement should detail the training provided to franchisees.
  • Duration: The agreement should specify the length of time for which the agreement is valid.
  • Termination: The agreement should outline the terms and conditions under which the agreement may be terminated.

What Should a Small Business Owner Consider Before Signing a Franchise Agreement?

When considering any agreement, one must take time to review the agreement carefully. Here are a few factors to keep in mind before signing a franchise agreement.

  • Fees: When evaluating franchise agreements, it is essential to consider fees. Some of the fees typically included in franchise agreements are initial franchise fees, royalty fees, advertising fees, renewal fees, transfer fees, and late fees.
  • Training: To ensure success, it is important to understand the quality of training provided by franchisors. Good training programs should equip a franchisee with a comprehensive understanding of the business.
  • Territory: One must carefully examine the proposed franchise territory. Is the territory exclusive, or will multiple franchisees operate in the same area?
  • Restrictions: Franchise agreements often have limitations on the franchisee’s ability to market or sell other products.
  • Brand reputation: It is crucial to research the franchisor’s reputation to see if the brand reputation is strong and worth associating with.

Franchise Agreements and Intellectual Property

In franchise agreements, franchisors, typically, own the intellectual property (IP). IP rights can be a complicated matter, and in some instances, disputes arise from misunderstandings of intellectual property rights. For franchisees, it is important to understand the ownership rights of the IP in a franchise agreement.

Franchise Agreements and Termination

Before signing any franchise agreement, it is essential to explore the franchisee’s ability to terminate the agreement. Some agreements require a notice period, while others demand termination for a specific reason or no reason at all.

The franchisor’s ability to end an agreement is also an element to consider. A franchisor may have the power to terminate if a franchisee breaches the agreement or fails to meet certain performance criteria.

Understanding Small Business Franchise Agreements

Small business owners who wish to expand their business have the option of franchising. Franchising is an approach in which an entrepreneur buys the rights to operate a business under the franchise’s name, and it has the benefit of being a ready-made business model.

Before one signs a small business franchise agreement, it is important to understand what it includes. Additionally, it is vital to keep a few factors in mind before you sign a franchise agreement. Analyzing fees, the training provided by franchisors, the proposed franchise territory, restrictions, and brand reputation is important.

Understanding a franchise agreement’s terms is critical to the success of a franchise business. Ensuring that intellectual property rights are well-defined is essential. Finally, taking note of the terms of termination for both parties is vital.


In conclusion, franchising can be a fantastic way for small business owners to expand their business. However, it is vital to understand the legal agreement. At Thompson Law, a small business law firm based in Lithia, Florida, our team of experienced lawyers ensure the protection of our clients’ rights under all matters regarding franchise agreements. With Thompson Law, you can rest assured that your business is protected.