Franchise agreements are legal documents that govern the relationship between a franchisor and a franchisee. They typically include franchise disclosure documents (FDDs) that are governed by the FTC Franchise Rule. A franchise agreement includes the franchisor’s and franchisee’s rights and obligations to license and sell a company’s intellectual property and licensing rights.
Examples of businesses that use franchise agreements include:
- Convenience stores
- Fast food and chain restaurants
- Financial advisors
- Healthcare providers
- Health clubs
- Real estate companies
- Retailers
- Travel agencies
To operate legally and successfully, you must have a franchise agreement if you intend to license your business for use as a franchise. Otherwise, your franchise agreements may contain pitfalls that will come back to bite you later. Make sure you have the right franchise agreement for your situation and that you understand how it works.
How Franchise Agreements Work
A franchisee buys the right to run a business under the franchisor’s established system, playbook, and brand. Franchises have a proven business model, and investors, particularly those with prior experience, want to capitalize on their returns. Expectations and guidelines must be agreed upon jointly by the franchisor and franchisee.
Here’s how a typical franchise agreement negotiation goes:
- Meet with the potential franchisee
- Establish the proposed territory rights for the franchisee’s location
- Set the minimum standards for performance and associated penalties for missed goals
- Determine how much you are willing to accept in exchange for your product’s or service’s use
- Create the advertising standards and intellectual property rights by which the transaction is governed
- Speak with franchising lawyers to help you translate your notes and conversations into a cohesive document
- Revisit with the franchisor to review the terms and conditions
- Schedule a franchise agreement signing for both parties
- Make copies for the franchisor and franchisee and distribute them
- Store your franchise agreement in a safe place and preferably with your other documents
Putting together a franchise agreement is a relatively simple process. However, you must carefully consider legal and financial issues. The idea behind a franchise is to help you make a lot of money and establish your brand. Check that your documents accurately reflect the level at which you operate.
Now, as we have discussed what a franchise agreement is and how it works. Let’s talk about how to draft it and what are the essential subjects in it.
How to Draft a Franchise Agreement?
There are six key subjects in a franchise agreement when finding the right franchise agreement for you:
1. Use of Trademarks
This section defines a critical subject of the contract. This section should include a list of the specific trademarks, service marks, or logos that a franchisee is permitted to use.
2. Location of the Franchise
If either party intends to limit the use of the given trademark to a specific territory, this should be specified in the contract as well.
3. Term of the Franchise
The franchisor may wish to limit the franchisee’s ability to exercise the given rights. This time frame must also be specified so that both parties understand the duration of their rights and obligations.
4. Franchisee’s Fees and Other Payments
The franchisee’s main obligation in exchange for the rights it receives is to pay fees. These fees can be paid once or regularly. Because a franchisee may be required to pay a variety of fees, it is necessary to consult with a lawyer before binding yourself to them by signing the contract.
5. Obligations and Duties of the Franchisor
The franchisee’s main obligation in exchange for the rights it receives is to pay fees. These fees can be paid once or regularly. Because a franchisee may be required to pay a variety of fees, it is necessary to consult with a lawyer before binding yourself to them by signing the contract.
6. Restriction on Goods and Services Offered
As previously stated, by entering into this agreement, the franchisor effectively duplicates its business. So, for the franchisee to provide goods or services of the same quality as the original business, the franchisor must impose some constraints. These constraints may include required quality standards, approved suppliers, authorized advertising, and so on.
If you want to develop a franchise agreement for your business, you should get in touch with sparkle★minds. With more than 20 years in the franchising industry, sparkle★minds has more than 500+ satisfied clients in franchising their business. Connect today with us!
