What should I check in the franchise agreement when buying a franchise business?

A franchise agreement runs for years and sets much of what your business may and may not do, so it deserves a slow, clause-by-clause read before you pay a deposit. Read it alongside the transfer paperwork and any disclosure document, not after them, and have a lawyer who handles franchise work read it with you. These are the sections to read first.

Term, renewal and what you inherit

Check how long the agreement runs from the day you take over and whether renewal is a right or the franchisor’s choice. Look at the conditions attached to renewal, such as renovating the premises or signing the then-current form of agreement. A short remaining term changes what you are actually buying.

Fees, territory and control

List every payment owed to the franchisor, such as royalties, advertising contributions, technology fees and transfer fees. Then read what the agreement says about your territory, required suppliers, approved products and how the franchisor can change the system. Controls that look routine in the seller’s hands can bind you for years.

Transfer, default and exit

Read the conditions for selling the franchise later, including franchisor approval, any right of first refusal and the fees on transfer. Then read the default and termination clauses, the period you get to fix a breach, any non-competition promise after the term, and any personal guarantee you are asked to sign. Our page on what a franchisee’s financials should show covers the numbers side.

Compare it with the disclosure and the law

Where a franchise statute requires a disclosure document, it must include copies of all proposed franchise agreements and other agreements relating to the franchise, so compare those copies with what you are asked to sign. A resale can be different: Ontario, British Columbia and Alberta each exempt the grant of a franchise by a franchisee from the disclosure requirement where the grant is for the franchisee’s own account and is not effected by or through the franchisor, so a resale buyer may receive no disclosure document and should ask the franchisor for the current agreement. Our page on what disclosure a franchise resale buyer gets covers that. Ontario, British Columbia and Alberta each impose a duty of fair dealing on franchise agreements. In British Columbia, a clause stopping franchisees from associating, a waiver of the Act’s rights (other than one made in settling a dispute), or a clause sending claims to a forum outside the province is void. Where no franchise statute applies, the contract and general contract law carry more of the weight.