Franchise Agreement

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name: franchise-agreement
description: Drafts FTC-compliant U.S. Franchise Agreements covering rights grants, territory, fees, operational standards, IP protection, transfer restrictions, default/termination, and post-term obligations. Flags state relationship and registration law issues. Use when drafting initial or renewal franchise agreements, negotiating franchise terms, or expanding a franchise system.
---

# Franchise Agreement

Drafts a litigation-hardened, FTC-compliant U.S. Franchise Agreement that protects franchisor IP and system standards while defining franchisee rights and obligations.

## Prerequisites

Collect before drafting:

- **Parties** — legal names, state of organization, principal place of business (both sides)
- **Brand/IP** — trademarks, service marks, trade names, logos, proprietary system description
- **Territory** — exclusive/non-exclusive/protected; defined by address, radius, zip codes, or other demarcation
- **Fees** — initial fee, royalty rate/basis, ad fund %, technology fees, transfer fee, renewal fee
- **Training** — duration, location, attendee requirements, cost allocation
- **Site/format** — fixed location or mobile; site selection responsibility; lease approval requirements
- **Carve-outs** — any deviations from franchisor's standard form

## Quick Start

1. Confirm FDD exists and is current — agreement must not contradict FDD disclosures
2. Draft agreement sections per the structure below using collected prerequisites
3. Build fee schedule with precise Gross Sales definition
4. Draft default/termination matrix with cure periods
5. Add post-term non-compete tailored to jurisdiction
6. Attach exhibits (territory map, personal guaranty, operations manual acknowledgment)
7. Run regulatory checks (FTC Rule, state relationship laws, registration states)

## Agreement Structure

| Section | Key Points |
|---|---|
| Parties & Recitals | Franchisor IP ownership; franchisee license desire |
| Grant of Rights | Marks licensed; format; territory type and boundaries |
| Term & Renewal | Initial term; renewal conditions (good standing, upgrade, current-form FA, fee); lapse consequences |
| Financial Obligations | Per fee schedule below |
| Franchisor Obligations | Training; ongoing support; Operations Manual; site/pre-opening assistance |
| Franchisee Obligations | System conformity; hours/staffing/service standards; owner involvement; insurance; reporting |
| Site Development | Approval process; deadlines (site selection, lease, construction, opening); failure-to-open remedy |
| IP Protection | Limited license only; goodwill flows to franchisor; mark non-contestation; confidentiality survives termination |
| Transfer & Assignment | Prior written consent; transfer fee; transferee training; ROFR; death/disability provisions |
| Default & Termination | Per default matrix below |
| Post-Termination | De-identification; return of materials; amounts due; non-compete |
| Relationship of Parties | Independent contractor; franchisee liable for employment, taxes, liabilities |
| Dispute Resolution | Governing law (franchisor home state, subject to franchise law limits); venue; mediation/arbitration; fee-shifting |
| General Provisions | Entire agreement; written amendments; waiver; severability; force majeure; notice addresses |

## Fee Schedule

| Fee | Requirements |
|---|---|
| Initial franchise fee | Fixed amount; due on signing |
| Royalty | % of Gross Sales; weekly/monthly; ACH/wire mechanics |
| Ad fund contribution | % of Gross Sales; administration description |
| Technology fee | Fixed or variable; escalation terms |
| Transfer fee | Fixed amount or % of sale price |
| Renewal fee | Fixed amount; due at renewal exercise |

Define **Gross Sales** with specificity — enumerate exclusions (sales tax, refunds, employee meals, etc.) to prevent disputes.

## Default & Termination Matrix

| Event | Notice | Cure Period |
|---|---|---|
| Abandonment / conviction / unauthorized transfer / lease loss | None | Immediate |
| Failure to pay fees or submit reports | Written | 10–15 days |
| System standards non-compliance | Written | 30 days |

## Post-Term Non-Compete

Draft as **1–2 years** from termination/expiration, within **specified radius** of former location and all system locations. Include blue-pencil clause. [VERIFY applicable state non-compete statutes]

## Exhibits

- Territory map and approved location description
- Personal guaranty form (standard for entity franchisees)
- Operations manual acknowledgment
- Table of contents if agreement exceeds 10 pages

## Regulatory Checks

- **FTC Franchise Rule** (16 C.F.R. Part 436): Agreement must align with FDD; prohibit misrepresentations; allow required rescission periods [VERIFY current Rule provisions]
- **Relationship law states** (CA, IL, IN, IA, MI, MN, NE, NJ, WA, WI): Require modified termination, renewal, and transfer provisions — flag if any are operating states
- **Registration states** (CA, HI, IL, IN, MD, MI, MN, NY, ND, RI, SD, VA, WA, WI): May restrict franchisor home-state governing law — flag if applicable

## Common Pitfalls

- **Vague territory language** — do not guarantee exclusivity unless territory is defined and exclusive in fact; this is a top litigation trigger
- **Goodwill misattribution** — all goodwill must flow to franchisor; never imply franchisee acquires mark rights
- **Overbroad non-competes** — must be reasonable in scope, duration, and geography to be enforceable
- **FDD/FA inconsistency** — agreement terms that contradict FDD disclosures create regulatory and litigation exposure