Table of Contents
What is a franchise agreement?
In a franchise agreement, a business that owns a franchise or a “franchisor” grants another business or “trader” the right to use proprietary marks and system to run a business or franchise. In most cases, the agreement limits the franchise to one location so that the franchisor cannot move elsewhere.
The franchise contract must also specify the amount to be paid by the trader. This may include initial payments and ongoing royalty payments. Prior to signing, the franchise user must understand everything written in the document including any limitations and provisions specified therein.
How does a franchise agreement differ from a license agreement?
Too often, people confuse franchise agreements with license agreements. Although similar, these documents are very different. There are three key factors that make a license a franchise:
- The franchise owner’s business is closely associated with the franchisor type. Speaking of franchises, the franchisor and all the traders share the same product.
- The franchise assists and controls the actions of the franchise owner, especially when it comes to how you use the franchisor type when conducting business. However, the business owner is still an independent contractor which means that the franchisor control is limited only by keeping the product standards, not in the way he manages his business.
- A trader pays a certain amount to a trader to gain franchise rights. This fee depends on what the franchisor puts at the beginning of the contract. Keep in mind, though, that there are many exceptions to this rule as provided for in the law.
- By means of a license agreement, the licensee allows the licensee to use his or her business premises or for any other reason. Licensing agreements have their own terms and conditions, but the content is different from that of franchise agreements.
Contents of a franchise agreement
Just as franchises differ from one another, franchise agreement templates also differ in content, language, and style. One thing they have in common is that the samples in the franchise agreement contain “agreements” which are rights, duties or promises that the franchisee does not owe the payer and vice versa.
Here are the basic agreements you can include in your franchise agreement:
• Franchise offerings
This section states that a franchisor entitles the franchise user to a non-transferable, exclusive, and limited right to use his or her logos, trademarks, services, and operating system for a specified period of time as specified in the agreement. Also, this section contains a statement about the franchisor’s right to terminate the contract in the event of a breach of contract.
• Business Information and Rights
This section contains information about the location of the franchisee. It also includes a timeline where the paid person should find the exact location of the franchise all the way until it opens. This section may also include other information such as business requirements and more.
• Purchase and Required Fees
This section covers all required purchases and fees to be paid for franchise rights. Other examples of costs include initial fees, franchisor pre-opening fees, fees, advertising fees, and more.
This section contains franchisor advertising obligations to promote the product.
• Time and Renewal
This section covers the length of the franchise agreement period. It starts from the day both parties sign the agreement until the expiry date of the agreement. If the franchisor grants renewal rights, terms are also included here.
• Services provided by Franchisor
This section contains information about franchisor pre- and post-opening services offered to the payer. If you are a franchisee and plan to enter into this agreement, be sure to write the statements correctly.
• Security Information
When it comes to franchises, the franchisor only gives a temporary license to the user. Therefore, it is important to include security information in the agreement that identifies each of the components that create privacy, trade confidentiality, and franchisor identity information. Also, specify restrictions on the right of the business owner to use this information.
This section covers any information about franchisor insurance training provided to the payer. Includes any additional conferences, meeting, training, etc. similar to what the franchisor encourages or requires the lender to attend.
• Quality control
At this stage, the franchisor meets certain quality control requirements of the franchise owner. This is very important to ensure that the products and services offered by the franchisee meet all the franchisor standard requirements.
All franchise contracts contain this agreement in which the franchisee controls the franchise owner’s right to transfer to a franchise relationship. At this stage, be sure to list all transfer requirements.
• Complaints Limits, Injuries, and Non-Payment
In this section, discuss the breach of contract that you will treat as a breach of contract. You can classify these violations into categories according to their severity. Also, include any consequences of violations such as penalties, suspensions, and more.
• Bonds On Expiration or Expiration
When a franchise relationship ends, there must be specific steps that the franchisee owner must take to “integrate” his or her connection with the franchisor system. Include these steps in the franchise agreement.
• Franchisor’s Right to First Refusal
Some agreements give the franchisor an option, not an obligation to exercise this right. This is important in cases where the payer wants to extend his or her consent or when the agreement is terminated or expires.
• Relationship Between Franchisor and Seller
Here, it is clarified that the franchisee is an independent contractor and not an agent or franchisor employee. This means that the business owner is the business owner. Therefore, the parties to the franchise contract are self-employed, co-operating with their employees, paying their business taxes, and operating independently as a whole.
This section contains information on how a franchise user should reimburse a franchisor for losses incurred as a result of a franchisee owner’s misconduct or negligence. Usually, such an agreement is one-sided and always benefits the franchisor.
• Non-compliance and other Similar Limits
The purpose of this agreement is to prevent any franchises from starting a business that competes with the franchisee. There are two parts to this agreement which are the words “in-term” and “post-term.”
The “timed” agreement states that the business owner must not compete with other shareholders or franchises while there is a franchise agreement. In contrast, the “post-term” agreement states that the franchise operator must not open a competitive business after the expiry of the contract or after the termination of the contract due to breach of contract.
• Conflict Resolution
This section contains information on any of the methods used by the franchisor to deal with shareholder disputes. These methods include non-binding mediation requirements followed by binding mediation requirements.
All franchise contracts must require franchisees to obtain certain insurance coverage for the operation of the business. Also, these insurance policies should include the franchisor as an “additional insurance” in order to provide the same insertion with the business owner.
What is the most common termination statement in a typical franchise agreement?
When creating a franchise agreement, which includes a termination statement or clause is also important. Typically, such a clause includes statements from a franchisor or franchisee to:
• suspend operations under a franchise contract where there is a breach of property of any party; or
• terminate a franchise agreement after an unresolved asset breach within a specified period of time.