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Understanding the Franchise Agreement

The franchise agreement underscores and outlines the working relationship between the franchisor and franchisee and is a legally binding document on both parties. The document needs to stipulate all the details of the agreement and can vary quite a lot depending on the type of franchise opportunity, the industry of operation and the general terms and conditions that were mutually discussed before the signing of the document. If you are looking to franchise your business, this is the most important document that will help you legally for any case in the future with your franchisee.

Bigger franchisors have a standard document for all franchisees to ensure that they are all treated equally and the franchise agreement contains all that the franchisor expects from the franchisees. However, there is no standard procedure that needs to be followed by all industries and franchisors and there is no standard format for this document.

Different from Franchise Disclosure Document

A quick note is due here. The franchise agreement should not be confused with the franchise disclosure document (known as the FDD). The franchise agreement is a legally binding document that is signed by both the franchisor and franchisee to indicate the start of their business partnership. On the other hand, the franchise disclosure document doesn’t signal the start of the business relationship. Rather it contains all the relevant information about the franchisor that should be of interest to a potential franchisee to determine whether or not he wants to get involved with the company. Thus if you are looking to franchise your business, the franchise disclosure document can be thought of as a marketing guide given to potential franchisees.

Key Elements

A franchisor is the one who usually drafts the franchise agreement and it will do a lot of good and potentially save a lot of trouble in the future if care is given to the details so that there are no problems encountered later during operations. Any discussions between the two parties that are relevant should be documented in the franchise agreement – even the ones orally agreed upon, because the contract has a legal status. Both parties should understand what is outlined in this agreement and abide by what it stipulates.

The following are some of the key points that need to be covered in your franchise agreement :

  • Operations: As a franchisor seeking to franchise your business, you will provide a set of rules that should be observed in running the business and the franchisee is legally bound to follow them. There could always be adjustments depending on the market conditions and the franchisee must be able to make adjustments accordingly. There are several features that need to be included in operations, like
    • Training and Support: Most franchisors have exclusive training programs for franchisees and staff that they design when they plan to franchise a business in order to maintain uniformity. Make sure the details of these programs are mentioned and outlined. Remember to include any relevant financial information and also the kind of training offered, from technical to administrative.
    • Territorial Rights: The franchise agreement should contain information regarding the territory that can be used to run the business by the franchisee.
    • Duration of the agreement: This needs to be mentioned to have a date after which the franchise agreement can be considered null and void. There should also be provisions regarding termination and renewal of the document.
    • Protocols: Most franchisors have their unique protocols they design when they first plan to franchise a business that they expect the franchisee to follow. These should be mentioned in detail in the franchise agreement.
    • Site Maintenance: This needs to contain details about how frequently the franchisee needs to replace items and details regarding different types of maintenance and upgrades required to the place.
  • Propriety: The franchisee needs to be given certain rights that belong to the franchisor, like the use of the company name, logo, brand, etc. Propriety details will greatly depend on the franchisor and can vary greatly from one type of business to another. They need to include –
    • Initial franchise fee: The franchisee needs to pay an initial fee that allows them to use the propriety rights in the first place. This needs to be outlined in the franchise agreement.
    • Trademarks: The document needs to include how the trademarks of the franchisor such as the name, logo, etc. can be used by the franchisee. In some cases, patents and intellectual property of the franchisor also need to be covered in this section.
    • Advertising: Many franchisors require the franchisees to cover costs of advertising the company. These details need to be worked out and put on the franchise agreement.
    • Fees: The franchisee pays a fee or royalty for using the brand name and all the other propriety material of the franchisor. In most cases, this is a percentage of the total sales.

The franchise agreement is the legal document that holds the relationship between franchisor and franchisee in the eyes of the law and hence needs to be carefully reviewed by both parties involved and their attorneys. It should contain all the details that have been discussed mutually to form a strong and lasting business relationship that is mutually profitable. To franchise a business can be a step towards greater success but it needs to be handled carefully to maximize returns.

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