Dreaming of running a small business but don't know where to start? It's likely you've considered franchising.
Launching a franchise business can be an exciting opportunity — if you know what you’re getting into. The franchise agreement is the most vital document you’ll sign. Not taking the time to understand it can lead to problems down the road.
No matter how closely you read the contract, it's easy to get lost in all the complex terms. We'll explore what a franchise agreement is, what it includes, and what to look for before signing.
Let’s get started.
What is a franchise agreement?
A franchise agreement defines the legal relationship between a franchisee and a company and gets signed at the time a franchisee decides to join.
Its goal is to set clear expectations and make sure everyone is on the same page. It also defines how the franchise relationship will evolve over time.
Here are the four different types of contracts you might encounter:
- The single-unit agreement: First-time franchisees often sign this contract. You'll have the right to operate only one franchise unit during your collaboration.
- The multi-unit agreement: A multi-unit agreement grants the right for franchisees to operate more than one unit.
- The area development agreement: Under this contract, franchisees are only allowed to run multiple units within a specific area and timeframe. You'll also have to pay a development fee along with a signup fee to join.
- The master franchise agreement: This agreement allows franchisees to become franchisors themselves. You’ll be able to sell your units to other franchisees within your location.
What are my rights and obligations?
Each company has exclusive rights to respect when you join their franchise system. Here's a list of rights and obligations that compose a franchise agreement:
- Ongoing training: A franchise should offer adequate training so you're ready for business. Training can include courses on trade secrets, finance management, marketing tactics, and general operations.
- Protection and support: The contract outlines what kind of help you'll receive. Support can come in the form of operations manuals, coaching, and more.
- Territorial rights: The contract will define which areas franchisees can do business in. It also explains who they may or may not sell their products to and what protection the brand offers for the area.
- Insurance requirements: Having the proper insurance is crucial for protection and business growth. The agreement will detail how much coverage you'll need before integrating the franchise.
- Defaults and damages: Franchises want to protect their reputation at all costs. The contract ensures the franchisee is liable for any accidents or defaults at your unit.
- Legal rights: The franchise agreement defines your legal rights based on state law. That includes regulations such as termination rights, indemnification, personal guarantees, and exit strategy.
What costs does the contract include?
Costs are a crucial factor to consider before signing a franchise agreement. So how much will you need to invest in getting your business off the ground?
The initial franchise fee you'll have to cover is just for signing up. With a standard franchise, you should expect to pay around $20,000-$50,000. Other expenses in the agreement include:
- Rent and license fee: Franchisees will need to invest in real estate to run their business. Location rent can represent around 5-15% of sales costs.
- Material and inventory: A franchise may require that you invest in your own equipment.
- Starting capital: Launching a successful business requires a certain amount of starting capital. Potential franchisees may also have to prove their financial stability.
- Marketing and advertising: Growing your business will involve investing in various marketing tactics. The agreement will detail how much you'll need to invest in advertising costs.
- Exit fees: You may realize over time that the franchise isn't a good fit and decide to leave. The contract details how much exit fees will cost you — which sometimes can go up to $600,000.
Keep in mind that you’ll have to cover royalty fees as well. How much you will spend on royalties will depend on your franchise. You should expect to pay around 4-12% of your revenue.
What to look for when reviewing your franchise agreement?
We can’t stress enough the importance of knowing what you’re getting into before signing. If possible, you may want to hire an attorney to help you review the agreement.
Here’s a checklist of things to look out for in the contract:
- Difficulty quitting: Going back to those exit fees, how hard is it to leave the franchise? You want peace of mind in case you ever decide to quit the business.
- Hidden fees: Nobody likes surprises. Take an in-depth look at each word of the contract — are there any hidden fees involved?
- Renewal rights: How easy is it to renew the contract once it’s over? What kind of support will you get from the franchisor?
- Average revenue: Think about your income goal. On average, how much revenue do franchisees in the business generate?
- Average turnover rate: A franchise with a high turnover rate is a major red flag to look out for. How many people quit the business each year?
- Average success rate: Talk to other franchisees who’ve entered the same business. You can find their contacts in the franchise disclosure document. How many of them are successful?
During your one-on-one meeting with the franchisor, ask as many questions as possible. Make your expectations clear from the start before signing the contract.
A smarter alternative to franchises
Franchise agreements can be confusing and hard to navigate. For many, the signup fee alone is a major obstacle, along with royalty fees and lack of independence. That’s why we've made an alternative process that's more direct and affordable.
Hoist’s goal is to make launching your business as simple as possible. Here’s how we differ from franchises:
- No upfront initial fees: Unlike a franchise, we won’t charge you any upfront fees for onboarding with us.
- Low startup costs: Franchises require you pay up to $60,000 to get started. With Hoist, you can launch your business with startup costs as low as $7,500, all money invested in your business — not a joining fee.
- Free training: We’ll give you coaching on how to grow and promote your business. It’s always free.
- Continuous support: On top of the free training, we’ll stay with you till you reach your goals. Gain access to more than 500 training modules, online forums, and Q&As to help you grow.
- Investing in you: We help you grow by investing capital in your business. As you hit your goals, we'll spend $10,000 to help you grow your business.
Begin your Success Story
Looking for support starting a business but don’t think a franchise is right for you? We can help. Apply for our New Owner Program and learn how you can build a profitable business in the painting industry.
We work with experts and technicians to provide the best training for exceptional entrepreneurs who are ready to own their own business. We'll show you every step of the way to guide you towards independence and success.