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Franchise Business Basics: Understanding the Franchise Agreement

Franchise Business Basics: Understanding the Franchise Agreement

Investigating how to start your own franchise business? Don’t overlook the franchise agreement. It’s a critical legally binding document that outlines the responsibilities and expectations of both the franchisor and the franchisee for the duration of the franchise relationship. It is designed to protect the franchisor’s intellectual property and ensure each franchise is operated in a similar fashion in order to maintain brand consistency.

Since the terms, conditions and operating protocols can vary widely from one franchise system to another, the franchise agreement is not a standardized document. However, all will include similar fundamental provisions detailing the rights and obligations of each party. These typically fall into one of three categories: conditions related to franchise ownership, your financial obligations or operation of the franchise.

Franchise Ownership

Grant of Franchise – This section identifies each party to the contract and contains an overview of the relationship. It grants the franchisee the right to use the franchisor’s trademark, logo, service mark, system of operation and outlines the franchisee’s overall obligations to operate in accordance with the franchise brand’s standards.

Initial Term and Renewal – The length of the relationship, measured from the time the agreement is signed, is specified in this section. Any prerequisites for renewal of the contract as well as the cost are also outlined. Some franchisors offer a discount for renewals while others require the full franchise fee.

Resale and Termination Policies – This provision dictates conditions for selling the franchise business and defines how much control the franchisor has over the process. Some franchisors secure right of first refusal giving them the option to buy back the franchise to retain ownership. Or, they may have approval/veto rights over prospective buyers. The percent of sale the franchisor is entitled to and when it must be paid are also outlined.

The termination policy will specify the conditions under which the franchisor can terminate the agreement prior to the expiration date and fees due if the franchisee ends the relationship before the agreement expires.

Financial Obligations

Initial and Ongoing Fees – The most common initial fee is the franchise fee. This grants franchisees the right to use the franchisor’s trademark and operating system. Some franchisors allow this fee to be paid in installments and some may even offer in-house financing.

Many agreements also include a number of additional fees that may be paid to the franchisor prior to opening or throughout the term of the contract like software license costs and initial inventory. Royalties are the most typical ongoing fee. They are usually a fixed percentage of gross sales paid on a weekly or monthly basis, although some franchise systems use a flat fee structure.

Advertising Fees and Obligations – This section outlines the franchisor’s commitment to the type of promotional assistance they will provide on the local and national level. Most collect fees from each franchisee that are pooled together in a brand development fund used for general brand marketing. Individual franchisee obligations for local marketing efforts are also defined along with guidelines for logo and trade/service mark usage.

Operation Requirements

Site Selection and Development – The time period for establishing a location and opening the business will be specified. Franchisees are typically responsible for securing their own location and building it out in accordance with the franchisor’s standards. Franchisors must approve the location and final design prior to opening.

Territory – This section defines the franchisee’s designated territory where they are authorized to operate and who they may or may not sell products or services to. Territories can be determined in a variety of ways such as by population or geographical boundaries and help minimize competition in the area that can limit sales and impede success. Some agreements provide for an exclusive or protected territory meaning the franchisor will not grant a competing franchise business within the same area.

Training and Support – Franchisors provide training to ensure franchisees and their staff learn uniform business practices. This section will outline the location and extent of initial and ongoing training, seminars, meetings, etc. Ongoing support provided by field representatives and headquarters will also be defined in this section. This additional support can include things like supply chain guidance, quality control, discounts on equipment and supplies, advertising subsidies and administrative and technical support.

Business Operations – The operations manual for your franchise is your business management bible. It dictates how the business must be run. These details will also be included in the business operations section of the franchise agreement and can include things like hours of operation, specific items or services sold, rules around procurement and supplies, pay scale for employees, processes and operating procedures, quality control measures and more.

The franchise agreement is a key document to your franchise investment. If you want to start your own franchise, it’s imperative to take the time to understand each provision and how it will impact your business. Make sure all expectations (of you as the franchisee as well as those you expect from the franchisor) are covered in writing. Since the franchise agreement specifies the operation of every facet of the business, it’s also a good idea to have it reviewed by a franchise lawyer to flag any questionable conditions before signing.

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We Proudly Support Our Veterans

Participating partners with the VetFran program, The UPS Store offers qualifying veterans $15,000 off their franchise fee to start their new business. To learn more, contact The UPS Store Franchise Development Team.

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Ranked for over 30 Consecutive Years

The UPS Store has been ranked #1 in the postal and business services category for over 30 years and remains in the top 5 overall for the seventh consecutive year according to the Franchise 500 list.

Kristin Howard

Franchisee, Michigan

The reason my husband and I decided to go into franchising and specifically with The UPS Store, is the different opportunities we're given with the business. The UPS Store has name recognition as well as opportunities to expand.

Debbie Adams

Franchisee, Kentucky

What I enjoy most about being a The UPS Store owner is working with my customers. We are the solution specialists for our customers.

Jim George

Franchisee, Illinios

My favorite part about The UPS Store network is the camaraderie with other franchisees. Everybody loves to help everybody else. You’re really part of a family.

Greg Murray

Franchisee, Florida

The interesting thing about The UPS Store is that when a customer walks through the door there's an extremely high probability that they're coming there to do something that is important to them. So at the end of the day, what we do for customers is very important and they are trusting that we are going to do it well.

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Mariana Huberman

Franchisee, Washington, D.C.

One of the things that I love about The UPS Store franchise system is that you're not ever in this by yourself. The franchisees of The UPS Store network are great.

Heidi Morris

Franchisee, Colorado

The thing I enjoy most about being a The UPS Store franchisee is I get to get up, go to work and know that I'm helping other business owners succeed in what they're doing.

Bob Brown

Franchisee, Tennessee

Owning a The UPS Store franchise has changed my life because it's finally given me the opportunity to engage my customers and my staff and be able to take real pride in what I do. As a franchisee, we get faced with solving peoples' problems every day and we do everything we possibly can to try to help.

Marie Jensen

Franchisee, Oregon

My favorite thing about The UPS Store is the variety. I love the variety of customers, I love the variety of services; getting to know the customers, meeting their needs, finding out how we can help them accomplish what they need to accomplish and seeing how happy they are. That makes me ecstatic.

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Tad Mollnhauer

Franchisee, Florida

With the products and services that The UPS Store provides we can make a difference in people's lives and that is the best reason for being a The UPS Store owner.

Joy Batchelor

Franchisee, Idaho

What makes being a The UPS Store franchisee worthwhile at the end of the day is the customers. The customers treat us like we're family.

Paul Erchinger

Franchisee, Texas

One nice benefit of owning a The UPS Store franchise for me has been that it gives me the opportunity to be more involved in the community. As I make relationships with others it seems like no matter what the environment is, in one way or another business comes out of that and that's not my objective—it's been a secondary benefit to being involved in the community.

Chris Reminder

Franchisee, Ohio

There are several things that I really enjoy about being a The UPS Store franchisee. First and foremost it allows me to get to know the people in the local community and that is a lot of fun. We get to see people on a regular basis. We get to know their life stories. That's a lot of fun.

Bruce Jones

Franchisee, Kentucky

Since we have joined The UPS Store, our life has changed by just having more time to spend together as a family. We've been very fortunate with the stores that we have and we have a great staff that looks out for our best interest and we look out for theirs.

Lonnie Williams

Franchisee, Oklahoma

What makes The UPS Store so successful is it gives each individual an opportunity to grow with the network and just meet the challenges that are brought to them on a daily basis. Every day gives us a new opportunity to help another person, to help another small business, to answer a question and to solve a problem.

Jeff Graham

Franchisee, Alabama

I love my customers. I love my employees. I love every person, every face that comes into my store. I enjoy every day going into work and I can't see doing anything else for the rest of my life.

Stacie Stigar

Franchisee, Alaska

I think that this franchise is so successful because of all of the resources that are available to us as center owners—we have marketing materials, we have so many different opportunities for help from the home office, and it just really makes for a great franchise.

Don Pollard

Franchisee, New Jersey

I think the thing that makes this franchise successful is a number of things. First of all we have an outstanding system, we have a great product, a great brand, and we're able to attract dynamic people to run these centers and run the business. So I think when you put all that together it really provides for a winning combination.

Mary Ellen Nichols

Franchisee, Tennessee

The thing I love about the franchise is that you have the UPS name backing you but yet you also have the autonomy to make your own decisions to promote.

Laura Griffin

Franchisee, Florida

In the eight short months I've owned my The UPS Store it has really changed my life. I've gone from being an employee of someone else to being an employer of my associates. It's a big responsibility but it's exciting every day.

Sandy Scandrett

Franchisee, Wisconsin

Being a The UPS Store franchisee has improved every aspect of my life. It's very rewarding financially, professionally, and emotionally. I have a large number of regular customers who are really, really appreciative of everything we do.

Kristie Robison

Franchisee, Alabama

I would say owning a The UPS Store location has changed my life to where I have more time and flexibility. In owning your own business you get your store up and running and you get employees that you can trust that are going to help keep your store running. This allows me to attend my two boys' ball games and also travel and do things with them so it has really changed my life for the better.