Franchise Agreement Red Flags: 12 Clauses to Check Before You Sign

Why are franchise agreements so one-sided?

The franchisor is protecting a brand that every other owner depends on, so uniformity is part of the deal. Standards, suppliers, signage and the operations manual all need to be consistent. The problem is that the same uniformity argument gets used to justify clauses that have nothing to do with the brand: open-ended fee rights, termination for minor defaults, and restrictions that follow you for years after you leave.

Federal law does not regulate the fairness of the contract. The FTC Franchise Rule (16 CFR Part 436) is a disclosure rule: it requires the franchisor to give you its Franchise Disclosure Document at least 14 calendar days before you sign a binding agreement or pay any money, and to give you the final agreement at least 7 calendar days before signing if the franchisor unilaterally and materially changed it. It does not stop a franchisor from offering harsh terms, as long as they are disclosed. Some states go further with relationship laws that limit termination and non-renewal, which is covered below.

Which fee clauses are red flags?

Royalties on gross sales are standard, commonly in the range of about 4% to 8%, plus a brand or advertising fund contribution of roughly 1% to 4%. Those numbers alone are not a red flag. The red flags are the clauses that let the total grow without your consent.

• 1. Minimum royalties. Language such as "the greater of 6% of Gross Sales or $1,500 per month" means you pay the floor in a slow month or in your first year while you ramp up. Ask for the minimum to start after 12 or 24 months, or to be waived during a ramp-up period.
• 2. Fees the franchisor can add or raise. Watch for "such other fees as Franchisor may reasonably require" or a technology fee "as set by Franchisor from time to time." Every fee should be listed in FDD Item 5 or Item 6. Ask for a cap on annual increases, for example no more than 5% a year or tied to CPI. In July 2024 FTC staff issued guidance saying that charging fees not disclosed in the FDD is likely an unfair or deceptive practice under the FTC Act; check whether that guidance is still current as of 2026.
• 3. Required suppliers that pay the franchisor. Item 8 must disclose whether the franchisor or its affiliates receive rebates or revenue from suppliers you must use. A required supplier is not wrong in itself; a required supplier that charges above-market prices and pays a rebate to the franchisor is a hidden royalty.

What territory and renewal terms should worry you?

• 4. No protected territory, or a territory full of reserved rights. If Item 12 says "You will not receive an exclusive territory," the franchisor can open another unit, or sell online and through delivery apps, right next to you. Even a granted territory can be hollowed out by carve-outs for non-traditional venues, e-commerce and other brands the franchisor owns.
• 5. Renewal on "then-current" terms. Most agreements let you renew only by signing the franchisor's then-current form of agreement, which "may contain materially different terms, including higher royalties and a smaller territory." You do not know today what you will be asked to sign in 10 years. Ask for a cap: renewal royalties no higher than the current rate plus 1 percentage point, and no reduction of the territory.
• 6. Mandatory remodels with no limit. Clauses requiring you to "remodel, refurbish and upgrade the Premises as Franchisor may require" can mean a six-figure bill at year 5 or as a condition of renewal. Ask for a limit on frequency (no more than once every 5 years), a dollar cap, and no remodel required in the last 2 years of the term unless you renew.

Can the franchisor terminate you for small mistakes?

Termination clauses are where franchise agreements are most aggressive, because losing the franchise usually means losing your entire investment.

• 7. Cross-default. A default under any other agreement with the franchisor or its affiliates (another unit, a supply contract, an equipment lease, a note) counts as a default under this one. For a multi-unit owner, one bad location can take down all of them. Ask to limit cross-default to monetary defaults that remain uncured after notice.
• 8. No cure period, or a very short one. Look for a list of "non-curable" defaults that includes vague items like "conduct which, in Franchisor's opinion, adversely affects the reputation of the System." A fair clause gives at least 30 days to cure operational defaults and 10 days for late payments, and limits non-curable defaults to serious matters such as abandonment, fraud or a felony conviction.
• 9. Liquidated damages for lost future royalties. If the agreement ends early, the franchisor may claim the royalties it "would have received" for the rest of the term, often calculated as your average monthly royalties times the remaining months, sometimes capped at 24 or 36 months. Courts in different states have reached different results on whether these clauses are enforceable, so do not assume one will be thrown out. Ask for a cap (for example 12 months of average royalties) and for no liquidated damages if the franchisor terminates without cause or you close after a defined loss period.

Who is personally on the hook?

Franchisors almost always require the owners of the franchisee company to sign a personal guarantee of every obligation under the agreement. That means forming an LLC does not protect your house, savings or other assets if the business fails with royalties, rent or liquidated damages unpaid.

• 10. A guaranty that includes your spouse. Some forms require "each Owner and the spouse of each Owner" to sign, even if the spouse has no role in the business. That exposes jointly held assets. Ask to remove a non-owner spouse, to cap the guaranty at a fixed amount or a number of months of royalties, and for the guaranty to fall away after a set period of good performance or on an approved transfer.

What happens when you leave or sell?

Also read the dispute resolution clause. Venue in the franchisor's home state, mandatory arbitration with a class action waiver, a jury waiver and a shortened limitations period (for example, claims must be brought within 1 year) all make it expensive to enforce your rights. Several registration states, such as California, have rules limiting out-of-state venue for in-state franchisees, and the FDD state addenda will say so.

• 11. A broad post-term non-compete. A common form bars you, your spouse and your immediate family from any "competitive business" for 2 years within 10 or 25 miles of your former location and of every other unit in the system. That can make it impossible to stay in the industry you just spent years learning. Enforceability depends heavily on state law; ask for 12 months, a radius around your own former location only, and a definition limited to businesses selling substantially the same products.
• 12. Transfer in the franchisor's "sole discretion," plus a general release. Selling your unit usually requires franchisor approval, a transfer fee, the buyer signing the then-current agreement, and you signing a general release of all claims against the franchisor. Many agreements also give the franchisor a right of first refusal, which can scare off buyers. Ask for consent "not to be unreasonably withheld," a fixed transfer fee, and a release that excludes claims that cannot be waived under state franchise law.

Red flag wording vs a fairer version

The table below summarises the most common risky wording and what a more balanced version looks like. Use it as a list of asks, not as a guarantee of what a franchisor will accept.

What can you realistically negotiate?

Expect resistance on the royalty rate, the brand fund and system standards, because changing those for one owner creates problems with every other owner. Expect more flexibility on items that only affect you: ramp-up waivers, the size and shape of your territory, development schedules, the guaranty cap, cure periods, remodel timing, and the post-term non-compete.

Put every agreed change in a signed addendum. Statements made by a salesperson, in an email or on a discovery day are not part of the contract, and most agreements include an integration clause saying the written agreement is everything. Be cautious with any questionnaire or acknowledgment asking you to confirm that nobody made promises to you. Under the NASAA Statement of Policy on franchise questionnaires, effective in many registration states from 2023, these documents cannot be used to make you disclaim reliance on what you were told.

When should you call a franchise attorney?

Always before you sign, and always before you pay a deposit that is not refundable. A franchise attorney (not a general business lawyer) knows which terms a given brand has conceded to others and how your state's franchise laws change the picture. Go in prepared: run the agreement and the FDD through an automated review first, list the clauses above that appear in yours, and spend the attorney's time on the ones that matter most for your deal.