The franchise agreement is the legal agreement that creates a franchise relationship between a franchisor and a franchisee. Within a franchise agreement the franchisee is granted the legal right to establish a franchised outlet and operation wherein the franchisee, among other things, obtains the license and right to utilize the franchisors trademarks, trade dress, business systems, operations manual and sources of supply in offering and selling the products and/or services designated by the franchisor. The Franchise Agreement must be legally disclosed as an exhibit to a franchisor’s Franchise Disclosure Document which must be disclosed to prospective franchisee’s prior to offering or selling any franchises.
As a franchisor your franchise agreement will serve as the primary and most important legal document that will govern and define the legal relationship with your franchisees. Within your franchise agreement you will be granting your franchisees the legal right to establish and develop their franchised locations and, in turn, the franchisees will be undertaking the obligation to establish and maintain their franchised operations in accordance with the mandates of your system and to pay to you certain on-going fees.
ESSENTIALS OF A FRANCHISEE AGREEMENT
- Location/territory. The franchise agreement will designate the territory in which you will operate and outline any exclusivity rights you may have.
- Operations. This section details how franchisees are expected to run their units.
- Training and ongoing support. Franchisors offer training and training programs for franchisees and their staff. Training may take place at corporate offices or out in the field. All ongoing administrative and technical support will also be outlined in the agreement.
- Duration. The document will detail the length of the duration of the franchise agreement.
- Franchise fee/investment. There will generally be an upfront initial franchise fee that grants the franchisee the right to use the franchisor's trademark and operating system. Those costs will be clearly outlined.
- Royalties/ongoing fees. Here you will find the details of the franchisor's royalty structure. Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, which is often paid on a monthly basis.
- Trademark/patent/signage. This section will outline how a franchisee can use the franchisor's trademark, patent, logo and signage.
- Advertising/marketing. The franchisor will reveal its advertising commitment and what fees franchisees are required to pay towards those costs.
- Renewal rights/termination/cancellation policies. The franchise agreement will describe how the franchisee can be renewed or terminated. Some franchisors include an arbitration clause. This requires, in the event of any legal action, that an arbitrator review the case before it goes to court.
- Exit strategies. Every franchise has its own resale policy. Some allow franchisees to sell their franchises at their discretion. Other agreements include buy back or right of first refusal clauses. These allow the franchisor to buy back the franchise at a rate determined by them or to match any potential buyer's offer.