What is a Franchise Agreement?
Lets Overview the Franchise agreement in detail from this definitive guide.
You have decided to start a franchising business, and for that, you might need to learn some basic aspects of a franchise agreement, such as analyzing your preferred industry, evaluating the costs, reviewing franchisor requirements, and examining the FDD (Franchise Disclosure Document) to get approval. Now comes the franchise agreement itself. Understanding each detail of the franchise agreement can make or break your deal.
Although you have already aware about what can be included in the franchise agreement still there may be aspects that require clarification or further confirmation? In this blog, you’ll find out the complexities of franchise agreements to help you identify any details you might need to revisit or verify before making a commitment.
An Overview of a Franchise Agreement
The franchise agreement is a legally binding document between a franchisor and franchisee. The franchisor grants the franchisee legal rights to operate a franchise outlet under the franchisor’s trademark or brand name. . In return, the franchisee receives a license and the rights to use the trademarks, business system, trade dress, sources of supply, and operation manuals to provide and market the franchisor’s products or services.
Franchise agreements are provided to both parties along with the Franchise Disclosure Document (FDD) at least 14 days before the agreement is finalized. The franchise agreement details the franchisor’s expectations from you as a franchisee. There is no standard form for franchise agreements because the terms, conditions, and operational methods vary depending on the type of franchise and the industry.
As well, you can contact with National Franchise Association (NFA), a franchise consulting and development services provider to get latest updates and consultation for your franchise startup as a franchisee. Get in touch with us!
How Does a Franchise Agreement Work?
As discussed, the franchisee chooses the franchisor from the desired industry, evaluate the cost to negotiate the terms based on the Franchise Disclosure Document (FDD), which outlines complete information about the roles of both parties. Once both parties have agreed, the franchise agreement is finalized. This document outlines all conditions and terms of the franchise relationship.
Once signed, franchisor provides the training on how franchise will perform according franchisor’s standards, what processes will be followed and what marketing strategies will be used in the franchise promotion.
Afterwards, franchisee now start working on a desired location mentioned the franchise agreement and begin operating it per the given guidelines from the franchisor and pay the agreed-upon fees. The franchisor provides all the guidance and support to the franchisee within the agreed framework for clarity and completeness.
Once an agreement near it ends, both parties’ deicide ether to renew or terminate it. If renewing, they may negotiate new terms or agree to the same conditions. If terminating, they follow the procedures outlined in the agreement for a smooth exit.
What Information is Included in a Franchise Agreement?
Although franchise agreements can vary based on the type of franchise, the franchisor’s brand value, and the industry, there are seven key aspects that are included in every franchise agreement.
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- Trademarks use: In this section franchisor are granting the access of its trademarks, business system and trade dress of the franchisor that franchise are obliged to used. Usually, the franchisor grant access of these rights for not more than 10 years but may vary on the type of franchise or business.
- Franchisee Location or territorial rights: This section mentions the territory or area that franchisee has allowed for use. It explains where the franchise business will operate. As well, it also mentions that franchisees are not allowed to operate in those areas where competing franchises exist.
- Franchise Terms and Conditions: This section covers how long the franchise agreement between both parties lasts. It also mentions all the terms and conditions on what basis a franchise agreement can be renewed before the expiration date.
- Franchisee’s Payments: This section outlines all essential fees, including the initial franchise fee, which is paid upon signing the agreement, as well as ongoing royalty fees, usually charged monthly or weekly. Other initial fees may include inventory, software licenses, and other start-up costs.
- Franchisor’s Training and Support: This section overviews the duties of franchisor such as prior to opening and any on-going training, headquarters support, quality control assurance assistance and supply chain management support.
- Limitation on offered product/services: This section outlines all the limitations of the product or services management such as approved supplier, operations hours, pricing, approved marketing and needed quality standards.
- Operating Procedures: This section specifies the procedures and systems that the franchisee must follow, including trading products authorized by the franchisor as outlined in the confidential operations manual.
- Non-Competes and Restrictive Covenants: This section is designed for the protection of the franchise system confidentiality. It covers “in-term restrictive covenants” mention that franchisee isn’t allowed to establish competing business while “post-termination restrictive covenants” mention that the franchise after termination aren’t allowed to do business for a certain period.
- Marketing Fees and Marketing Obligations: Marketing Fees and Obligations: This section details whether the franchisee is required to pay advertising or marketing fees to the franchisor. It also covers contributions to brand development and local marketing efforts.
- Legal Rights and Authority: The franchise agreement specifies which state’s laws will govern its interpretation usually the state where the franchisor’s head office is located. It also designates the arbitration organization or court that will handle any disputes between the franchisor and franchisee.
- Franchisee’s Record-Keeping and Rights to Audit: This section outlines the records the franchisee must maintain and the franchisor’s right to access and audit these records, including online data, over time.
FAQ's
The major benefits are you can begin a business using a proven business model and built-in brand system, with added support of ongoing training from the franchisor.
Franchise agreement that is well-drafted safeguard the franchisor brand. It gives clarity of all the obligations and rights of both parties and confirms consistency, assurance and approvals.
The four types of franchise agreement are:
Single-unit Franchise agreement: Agreed on single locations.
Multi-Unit franchise agreement: Agreed on multiple locations.
Area Development Agreement: Agreed on single location in a time frame.
Master Franchise agreement: Develop various units in a particular region.
Conclusion
Keep in mind that franchise agreements can be negotiated, but only a minor. While franchisees can request adjustments to the terms to make them more favorable, the big, important parts like royalty payments and initial fees stay the same. Franchisor need to keep things consistent across all their franchises, so major changes aren’t often made.
Developing an accurate franchise agreement, an evaluation of each factor of both parties needs inspection and then decision can be made. Before getting in touch with the lawyer, it is preferable to have thorough research, profound cost evaluation and build solid business plan.
As on top of that, franchisee can get in touch with reputable franchising consulting company such as National Franchise Association to get the update guidance and support.
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