Franchise agreement terms

A franchise agreement is a licence for a fixed period, not a business you own outright. It sets how long you may use the brand, where, on what terms you may renew or sell, and what happens if either side ends it early. Those terms change what a location is worth as much as its sales do, and they are where franchise agreements differ most from brand to brand.

How long a franchise agreement lasts

Of the 942 brands whose term is known, the median runs 10 years. Ten years is the standard for service businesses and most restaurants. Longer terms of 15 to 20 years are common where the owner builds or buys a building, since a lender needs the franchise to outlast a long loan. Short terms of five years or less belong mostly to brands with little invested up front.

A short term isn’t necessarily worse if renewal is easy and cheap, and a long one isn’t better if the agreement lets the franchisor change the rules along the way. Read the term together with the renewal conditions.

Agreement length by industry

Hotel, auto repair and oil change brands run the longest typical terms, reflecting buildings and equipment that take many years to pay off. Most other industries settle on 10 years.

Territory protection

A protected territory is an area where the franchisor agrees not to put another location of the same brand. Of the 2,124 brands whose terms are known, 788 grant one, 850 give limited protection (for example only until a population threshold is reached, or only against company-owned locations), and 486 give no exclusive territory at all.

Where brands define a territory by size, the filing says how:

Renewing a franchise agreement

Most agreements let you renew if you are in good standing, but on conditions: you usually sign the franchisor’s then-current agreement, which may carry a higher royalty or marketing fee, refurbish the location to current standards, sign a release of claims and pay a renewal fee. Of the 1,577 brands whose renewal fee is known, 1,056 charge a flat amount, typically $5K, and 504 charge a share of the current franchise fee, typically 25%.

The refurbishment can cost far more than the fee. A restaurant asked to rebuild to a new design at renewal can face a bill close to the cost of a new location, so ask current owners what the last renewal required.

Ending early and selling

You can’t usually walk away from a franchise agreement before it ends without paying for it. Many agreements set damages for early termination, often a number of months or years of royalties, and keep a non-compete in force afterwards. The franchisor can end the agreement for listed defaults, such as unpaid fees, failed inspections or abandoning the location, usually after a notice period to fix the problem.

Selling is the normal way out. Nearly every agreement allows a transfer to an approved buyer for a fee; the resale guide lists transfer fees by brand. The failure rates guide shows how often agreements are terminated or not renewed.

Clauses to read first

Before you sign, read the term and renewal conditions, the territory and its exceptions, the transfer conditions and fee, the termination defaults and any early-termination damages, and the non-compete after the agreement ends. Then read anything that lets the franchisor change your obligations during the term, such as new technology fees, required remodels or higher marketing contributions. Have a franchise lawyer review the agreement; it is a small cost next to a ten-year commitment.

The guide to the franchise disclosure document explains where each of these appears, and the steps to buying a franchise show when in the process to read them.