A Franchise Agreement is a legally binding contract between a franchisor (the brand owner) and a franchisee (the independent operator) that grants the franchisee the right to operate a business under the franchisor's trademark, business system, and operational methods. Regulated at the federal level by the FTC Franchise Rule (16 CFR Part 436) and at the state level by franchise-specific statutes in approximately 15 registration states (including California, New York, Illinois, and Minnesota), the franchise agreement defines the entire commercial relationship between the parties.

The FTC Franchise Rule requires franchisors to provide a Franchise Disclosure Document (FDD) containing 23 specific items of disclosure at least 14 calendar days before the franchisee signs any binding agreement or pays any money. The franchise agreement itself is typically attached as an exhibit to the FDD and constitutes the operative legal document governing day-to-day operations, fee structures, territorial boundaries, and the term of the relationship.

Franchise agreements are distinct from standard business contracts because they involve the licensing of intellectual property (trademarks, trade dress, proprietary systems), ongoing operational control by the franchisor, and a continuing royalty payment obligation. State franchise relationship laws in jurisdictions like California (Business and Professions Code Section 20000), Wisconsin, Iowa, and New Jersey provide additional protections to franchisees, including restrictions on termination without good cause and requirements for reasonable cure periods before termination.

A Franchise Agreement is required whenever a business relationship meets the FTC's three-part definition of a franchise: the franchisor grants the right to use its trademark, the franchisor exercises significant operational control or provides significant assistance, and the franchisee pays a fee of $615 or more (adjusted periodically) within the first six months of operation. This covers traditional brick-and-mortar franchises like restaurants and retail stores, service-based franchises such as cleaning, tutoring, or home repair, and business format franchises across virtually every industry.

Specific scenarios requiring a franchise agreement include opening a new franchise location under an established brand, renewing an expiring franchise agreement at the end of its initial term, transferring or selling an existing franchise to a new owner (which typically requires franchisor approval and a new agreement), converting an independent business into a franchise location, and granting area development rights for multiple franchise units within a defined territory.

Operating a franchise without a properly executed agreement exposes both parties to significant legal risk. The franchisee lacks documented territorial protections, renewal rights, and dispute resolution procedures. The franchisor risks losing trademark rights through uncontrolled licensing. State registration laws may impose penalties on franchisors who sell franchises without proper registration and disclosure, including rescission rights for the franchisee and civil fines.

A comprehensive Franchise Agreement must define the franchise grant — specifying the exact trademark, trade name, and business system being licensed, along with any approved variations. The territory clause should clearly delineate whether the franchisee receives an exclusive, protected, or non-exclusive territory, and define the geographic boundaries using specific addresses, zip codes, or radius measurements.

The financial terms must detail the initial franchise fee (which can range from $10,000 to $100,000+ depending on the brand), the ongoing royalty rate (typically 4-8% of gross sales), advertising fund contributions (commonly 1-3% of gross sales), and any technology fees, transfer fees, or renewal fees. Payment terms should specify due dates, acceptable payment methods, late payment penalties, and the franchisor's audit rights to verify reported sales figures.

Operational requirements represent the core of the franchise relationship. The agreement should address required training programs, ongoing operational standards and quality controls, approved supplier lists, required business hours, staffing requirements, insurance minimums, record-keeping obligations, and the franchisor's right to inspect premises. The intellectual property section must establish the franchisee's limited right to use the trademark, restrictions on modifications, and the obligation to cease all trademark use upon termination.

Termination and renewal provisions are among the most critical clauses. The agreement should specify the initial term (commonly 5-20 years), conditions for renewal, grounds for termination by either party, required cure periods before termination for curable defaults, post-termination obligations (including de-identification and non-compete covenants), and the franchisee's transfer rights. A dispute resolution clause — often requiring mediation or arbitration before litigation — and a governing law provision complete the essential framework.