Franchise Agreement Red Flags: Six Clauses to Check Before You Sign
This page is general information, not legal advice.
A franchise agreement is the contract that lets you run a business under someone else's brand and system. It decides what you pay, where you can operate, what you must buy and spend, how long the deal lasts and what happens when it ends. In the US, many franchise offers come with a Franchise Disclosure Document that describes the franchisor, its fees and its typical agreement, and some states add their own franchise relationship rules. The agreement itself is usually long, written by the franchisor and presented as standard for every location, so it's easy to focus on the brand and skim the terms. This page covers six clauses that often move cost and risk onto the franchisee. For each one you get an illustrative example, why it matters, and wording you can propose. Franchise rules vary by jurisdiction, and some franchisors will negotiate certain terms, especially for experienced operators or multi-unit deals.
Read the disclosure document and the agreement side by side. If the two don't match, or a promise you heard in a sales meeting appears in neither, ask about it in writing before you sign.
The example clauses below are illustrative. They are not taken from any real franchisor's agreement.
1. Fees the franchisor can add or raise, and required suppliers
A typical clause might read: "Franchisee shall pay all fees set out in the Operations Manual, as amended by Franchisor from time to time, including technology, marketing fund and training fees. Franchisee shall purchase all products, equipment and services only from suppliers designated by Franchisor, which may include Franchisor or its affiliates."
Why it works against you
The royalty in the agreement may be only part of your cost. If the franchisor can add new fees through a manual it controls, your total cost can rise after you've already invested. Required suppliers can make sense for brand consistency, but they can also mean paying more than you would on the open market, and the franchisor or its affiliates may earn money on those purchases. See unilateral amendment clauses explained and automatic price increase clauses explained.
What to ask for instead
Sample wording to propose: "The only fees payable by Franchisee are those listed in Schedule [X]. Franchisor will not add new fees or increase existing fees by more than [percentage] per year without Franchisee's written consent. Franchisor will disclose any rebates or payments it or its affiliates receive from designated suppliers, and Franchisee may propose alternative suppliers that meet Franchisor's written standards."
2. No protected territory, or one with large carve-outs
A typical clause might read: "Franchisee is granted the right to operate one Unit at the Approved Location. Franchisee receives no exclusive territory. Franchisor reserves all rights to sell products online, through other channels and at any other location, including locations near the Approved Location."
Why it works against you
Without a protected territory, the franchisor may open another location, or license someone else to, close enough to take your customers. Even when the agreement gives you a territory, reserved rights for online sales, delivery apps, grocery products or "non-traditional" sites like airports and campuses can hollow it out. See exclusivity clauses explained.
What to ask for instead
Sample wording to propose: "During the Term, Franchisor will not operate or license another Unit within [the territory described in Schedule X]. Sales by Franchisor through online or other channels for delivery within the territory will be [shared with Franchisee as set out in Schedule X / limited as described in Schedule X]."
3. Renewal only on the franchisor's then-current terms
A typical clause might read: "Franchisee may renew for one additional term by signing Franchisor's then-current form of franchise agreement, which may contain materially different terms, including higher royalty and advertising fees and a smaller territory. Franchisee shall pay a renewal fee and sign a general release."
Why it works against you
You may build the business for years expecting to renew, only to find the renewal agreement costs more and gives you less. Because you've already invested in the location, you may have little practical choice but to accept. A required release at renewal may also mean giving up claims you have against the franchisor. See auto-renewal clauses explained.
What to ask for instead
Sample wording to propose: "On renewal, the royalty rate, advertising contribution and territory will not change from those in this Agreement, except that the royalty may increase by no more than [amount]. The renewal fee will not exceed [amount]. Any release on renewal will exclude claims arising under this Agreement that Franchisee has notified in writing."
4. Remodels and upgrades with no limit on cost or frequency
A typical clause might read: "Franchisee shall, at its own expense, remodel, refurbish and upgrade the premises, equipment and technology systems as Franchisor may require from time to time to conform to Franchisor's current standards."
Why it works against you
Brand standards change, and a clause like this lets the franchisor require new signage, layouts, kitchen equipment or point-of-sale systems whenever it decides to. A major remodel can cost a large share of what you originally spent, and it may come late in the term, when you have little time left to earn it back.
What to ask for instead
Sample wording to propose: "Franchisor may require a major remodel no more than once every [number] years, and not during the last [number] years of the Term unless the Term is renewed. Required upgrades in any [number]-year period will not exceed [amount] in total. Franchisor will give at least [number] months' written notice of any required remodel."
5. A personal or spousal guarantee
A typical clause might read: "Each owner of Franchisee, and each owner's spouse, shall personally and jointly and severally guarantee all obligations of Franchisee under this Agreement and any related agreements."
Why it works against you
Even if you set up a company to own the franchise, a personal guarantee can put your own savings, home and other assets on the line if the business fails. Including spouses who aren't involved in the business widens that risk to your household. "Related agreements" may pull in leases, equipment financing or supply contracts too. See personal guarantee clauses explained.
What to ask for instead
Sample wording to propose: "The guarantee is given only by [named owner], is limited to [amount or a set number of months of royalties], and does not apply to any spouse who is not an owner. The guarantee covers only this Agreement and ends [number] months after a permitted transfer or the end of the Term."
6. A broad non-compete and damages based on future royalties
A typical clause might read: "For two (2) years after expiration or termination, Franchisee and its owners shall not engage in any similar business within twenty-five (25) miles of any Unit in the system. If this Agreement ends before the end of the Term for any reason other than Franchisor's breach, Franchisee shall pay as damages the royalties that would have been payable for the remainder of the Term."
Why it works against you
If the business doesn't work out, you may be barred from using your experience in the same industry across a wide area, which could cover most of your region. Measuring damages by future royalties can turn an early exit into a large bill, even when the franchisor is free to re-sell the territory. Whether these clauses are enforceable varies by state. See non-compete clauses explained, liquidated damages clauses explained and early termination fee clauses explained.
What to ask for instead
Sample wording to propose: "The post-term restriction applies only within [number] miles of the Approved Location, lasts no more than [number] months, and does not apply if Franchisor terminates without cause or does not offer renewal. Damages for early termination will not exceed [number] months of average royalties and will be reduced by any amounts Franchisor receives from a replacement franchisee for the territory."
Also worth a look
Check whether you can sell the franchise or bring in partners, and what approvals and transfer fees apply (see assignment clauses explained and right of first refusal clauses explained). Look at audit rights over your books, insurance minimums and whether disputes must go to arbitration in the franchisor's home state (see audit rights clauses explained, insurance requirements clauses explained and governing law and jurisdiction clauses explained). If you're comparing a franchise with a looser brand relationship, see reseller and distribution agreement red flags and commercial lease red flags for the premises.
Scan your own agreement free
A franchise agreement can lock in your costs and options for many years. Upload your agreement to the ScanMyTerms freelance contract review as a PDF, DOCX, TXT or MD file, photograph it (up to 30 pages), or paste the terms. In about a minute you get a list of clauses that work against you, with the risk level, the exact wording, why it hurts and how to change it. The free preview shows the risk count and the first two findings. The full report is $5 per document.
This page is general information, not legal advice. Franchise disclosure, franchise relationship and non-compete rules vary by jurisdiction, so for decisions about a specific contract, talk to a qualified lawyer where you live.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real franchisor's agreement.