How to Understand a Single Franchise Agreement

Many people dream of owning their own business but not all have the expertise to start one. Building a business from scratch requires knowledge, time and money. Those who are successful at building a business and can replicate their success may help others own their own businesses via franchising. When considering the purchase of a franchise, you will want to read the franchise agreement thoroughly as there are several specifics you want to be sure you understand well. There is not a standard format for franchise agreements, but any contractual agreement should outline the following costs, terms and conditions.

Instructions

1. Consider the franchise fee. All franchises charge a franchise fee. This one time fee is the cost of obtaining the franchise and typically includes initial training.

2. Consider other upfront costs. The franchise fee typically includes access to the knowledge and expertise of the franchisor as well as their brand name. The fee doesn't usually include purchasing inventory, setting up a store or other business costs. Consider the total investment you'll need to make outside of the franchise fee and be realistic about what it will take to get started.

3. Consider the royalty fee. Royalties are on-going fees paid to the franchisor for the continued use of their knowledge, trademarks, brand name and expertise in running the franchise. Royalty fees are usually charged as a percentage of gross business revenue.

4. Consider other ongoing costs. Outside of royalties, franchise agreements can stipulate other ongoing costs such as advertising requirements. Be sure you understand the total amount your franchise agreement commits you to spending.

Tips & Warnings

• If you feel like you need help further understanding a franchise agreement, contact a business attorney.