What are the key subjects in a franchise agreement?

Written by Sparkleminds

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.

What are the key subjects in a franchise agreement?

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:

  1. 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
  1. 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!

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How to end a franchise agreement Gracefully at Contract Renewal?

Written by Sparkleminds

Generally speaking, franchisors and franchisees have positive relationships. However, in rare cases when the relationship between a franchisor and franchisee does not feel right, terminating the Franchise agreement at renewal time may be the most beneficial move.

How to end a franchise agreement Gracefully at Contract Renewal?
How to end a franchise agreement Gracefully at Contract Renewal?

This Blog will explain how to end a franchise agreement, some common reasons why franchise contracts don’t renew, and some top franchisor tips for ending a franchise agreement gracefully. 

Reasons to avoid franchise agreement renewal 

Franchising involves a lot of decision-making and responsibility, and it isn’t always easy. The key to a successful franchise operation is finding fantastic franchisees who will support your vision and make your life easier. Two ways exist for you to end a business relationship with a franchisee if you feel you’ve found the wrong franchisee:

Termination of the franchise agreement – The agreement is canceled before the end of a franchisee’s contract term.

Non-renewal of the franchise agreement – The agreement is not renewed at the end of a franchisee’s contract term.

To make the best decision, you’ll need to have a thorough understanding of the different franchise renewal rights available to you. A franchisor can terminate or refuse to renew a franchise agreement if a franchisee has committed a “repudiatory breach”.

When a contract is breached by a repudiatory breach, the non-defaulting party is entitled to terminate the contract and is thereby released from its terms. As there are risks if you get it wrong, it’s important that you are certain of your position. —Eldwick Law

Examples of contract breaches that would fit this bill include:

  • Failure to obtain the correct licenses
  • Being involved in illegal activities
  • Failure to pay franchise fees or royalties 
  • Bankruptcy
  • Neglecting to follow franchisor guidelines, such as operations instructions and branding and marketing guidelines

How to end a franchise agreement 

You can terminate a franchise agreement by:

1. Ensuring you have the right to do so

Depending on what kind of breach you are dealing with, this step will differ. The law of contracts gives different weight to different clauses, and some situations will be more clear-cut than others. Whatever you’re dealing with, be certain that you have the legal right to terminate or reject renewal before you reach out to the franchisee and get the ball rolling.

2. Notifying the franchisee

The following information should be included in your breach notice to your franchisee:

  • How the franchise agreement terms have been violated (or breached), and the nature of the breach (or breaches)
  • A timeline for making reparations, as well as information about how the breach can be repaired (if this is possible)
  • There must be a clear statement that if the breach is not resolved, the franchise agreement will be terminated

It will no longer be possible to terminate the franchise agreement if a franchisee resolves the breach or breaches you’ve mentioned in this notice.

3. Tying up loose ends

The franchisee must pay any outstanding fees when leaving the franchise, and must return all paperwork and documentation regarding the franchise. At this point, a franchisee may also be required to sign an agreement promising not to start a competing business within a certain period.

There are four tips franchisors can use to end the franchise agreement in a conflict-free manner

  •  Always seek legal advice early

Get legal advice as soon as possible if you are uncertain whether you have a case for termination. Regardless of how simple or clear things seem, seek legal advice immediately. Do not contact your franchisee with a breach notice until you are absolutely certain you are in the right. Franchisees who wrongfully terminate agreements are likely to make legal claims against you, causing financial and reputational damage to your entire company.

You will be able to determine your next steps with the help of legal advice. The contract can be terminated immediately if a serious breach has been committed. The franchisee might also be suspended pending further investigation if your legal advisor advises you to do so.

  •  Turn to forced termination as the last possible option

Before terminating your franchise, communicate with your franchisee and offer ways to resolve the issue. Try to reach an agreement with your franchisee about the terms of their exit once you’ve decided definitively that you will be terminating the agreement through a forced termination. If you can do this, you’ll both come out of the relationship better off.

A new franchisee might be interested in buying the franchise location, for example. Therefore, the franchisor will lose less income and the franchisee will likely get back at least some of their investment. 

  •  Show your willingness to compromise 

Consider your situation carefully if you must choose between losing a one-time sum of money and ending your relationship with your franchisee without conflict. Despite the monetary loss initially appearing to be more problematic, it could solidify the good reputation of your franchise. 

You’re much less likely to lose a franchisee if you show your willingness to compromise during negotiations and be mindful of their needs.

  •  End things on a good note

You should also do your best to end negotiations on a positive note. It is still highly recommended that you behave politely and professionally in the final stages of the franchise agreement, even if both parties have experienced difficulties during the process. This will reduce the chances that a franchisee will attempt to take legal action against you (whether this legal action is valid or not).

Effective franchisors prioritize their franchisees

The franchisor’s role includes prioritizing franchisee satisfaction as one of its most important responsibilities. Franchisees who are happy are hard-working and do their best to help your business succeed. 

Sparkleminds can help you franchise your business both nationally and internationally. It has helped more than 500 businesses in franchising their businesses. So, what are you waiting for? Connect with us today!

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