FRANCHISE LAW
How to Set Up a Franchise Agreement: What to Include
To set up a franchise agreement, you draft a contract that licenses your brand, sets the rules of operation, and defines the money flow — but the agreement never stands alone: if your deal meets the federal definition of a franchise, the agreement must travel inside a Franchise Disclosure Document (FDD) you deliver before anyone signs. Getting this order right is the difference between launching a compliant franchise system and accidentally selling unregistered franchises.
Start by confirming what you are actually creating, then build the agreement around the clauses that matter.
First, Confirm You Are Really Selling a “Franchise”
The Federal Trade Commission defines a franchise by a three-part test (16 C.F.R. Part 436). If your arrangement has all three elements, it is a franchise — whatever you call it — and federal franchise law applies:
- Trademark. The other party gets the right to operate under, or sell goods and services associated with, your brand or trademark.
- Significant control or assistance. You exert significant control over, or provide significant assistance to, how they run the business.
- A required payment. They pay you (or an affiliate) at least $500 before opening or within the first six months of operation.
This matters because meeting the test triggers the FDD obligation. You cannot just hand a buyer a “franchise agreement” — you must first give them an FDD, with the agreement attached as an exhibit, at least 14 calendar days before they sign or pay. Skip that step and the contract is exposed, no matter how well it is written. For how the two documents differ, see the FDD quick guide.
The Core Clauses Every Franchise Agreement Needs
A franchise agreement is a long contract, but its substance clusters around a handful of subjects. Each one is a place where vague drafting causes expensive disputes later.
| Clause | What it sets | Why it matters |
|---|---|---|
| Grant & trademark license | The right to use your brand and system | Defines what the franchisee actually bought |
| Term & renewal | Length of the deal and renewal conditions | Controls the lifecycle and your future flexibility |
| Fees & royalties | Initial fee, ongoing royalty, ad fund | Defines your revenue and the franchisee’s cost |
| Territory | Exclusive or non-exclusive operating area | A top source of franchisee disputes |
| Standards & operations | Brand standards, the operations manual, training | Protects brand consistency across units |
| Transfer & assignment | When and how a franchisee can sell | Controls who joins your system |
| Termination & default | Grounds and cure periods for ending the deal | Determines how cleanly you can exit a bad fit |
| Post-term covenants | Non-compete and confidentiality after the deal ends | Protects your system after departure |
| Dispute resolution | Governing law, venue, arbitration or mediation | Decides where and how fights are resolved |
A few of these deserve extra care. Territory is among the most litigated clauses, so define the boundaries and any reserved channels precisely; see how to get the best territory in a franchise agreement. Post-term non-competes are powerful but their enforceability varies by state and is shifting, so draft them with current law in mind rather than from an old template — see how non-compete clauses typically work.
The Agreement and the FDD Are Built Together
Because the agreement is an exhibit to the FDD, you do not draft them in isolation. The numbers in your agreement — initial fee, royalty rate, estimated investment — have to match what you disclose in the FDD’s Items 5, 6, and 7. The territory in the agreement has to match Item 12. When the disclosure and the contract describe the same term differently, you have a compliance problem and a credibility problem. Build them as one package so they stay consistent. For the franchisee’s-eye view of the finished contract, the franchise agreement template overview shows how the rights and obligations fit together.
Then Handle Registration Before You Sell
Drafting is not the finish line. Roughly a dozen “registration states” — including California, New York, Illinois, and Washington — require you to register the FDD with a state agency before offering franchises there, and a separate group of “filing” or “notice” states, including Texas, require a notice. Where you can legally sell depends on which of these states you have cleared. Plan registration into your launch timeline, not after it.
A Practical Build Order
The sequence that keeps new franchisors out of trouble looks like this: confirm the three-element test applies; protect your trademark; draft the franchise agreement and FDD together as one package; have counsel pressure-test the territory, renewal, termination, and non-compete clauses against current law; register or file in every state where you intend to sell; and only then deliver the FDD and start the 14-day disclosure clock. Each step depends on the one before it, which is why a do-it-yourself agreement pulled from a template tends to unravel at registration.
Frequently Asked Questions
Do I need an FDD, or just a franchise agreement?
Both, and in a specific order. If your deal meets the FTC’s three-element test, you must deliver an FDD — with the franchise agreement attached as an exhibit — at least 14 days before the buyer signs or pays. The agreement alone is not compliant.
What makes my arrangement a “franchise”?
Three things together: a trademark license, significant control or assistance over operations, and a required payment of $500 or more before opening or in the first six months. Meet all three and federal franchise law applies.
What are the most important clauses to get right?
Territory, fees and royalties, term and renewal, termination and default, and post-term non-competes. These cause the most disputes and are where careful, state-aware drafting pays off.
Can I use a franchise agreement template I found online?
It is risky. A generic template will not match your FDD, will not account for your states’ registration rules, and often carries clauses that are unenforceable where you operate. Use it for orientation, not as your actual contract.
Building a franchise system is a sequence of dependent legal steps, and the agreement is only one of them. Reidel Law Firm builds franchise agreements and FDDs for new franchisors through a fixed-scope Startup Franchising package with direct attorney access — explore our Startup Franchising package.
