Franchise Agreement: 24 Important Things to Know

 

Relationships between a franchisor and a franchisee don't just appear overnight. More than a handshake, good intentions, and an unstated understanding of what each party expects from the partnership are needed to establish a franchise. You need a list of specific, legally binding responsibilities and safeguards to get things moving. 

What is a franchise contract? 

A franchise agreement establishes a partnership between a franchisor and a franchisee and is a binding legal document. These agreements grant the right to use franchise-specific resources, such as branding, business methods, and supply sources, and permit the franchisee to open a franchise site. 

Let's examine a franchise agreement in further detail to understand what to look for. 

1. Basis for Agreement 

This section acknowledges the goals of the franchisor and franchisee, as well as the benefits that each will derive from the contract. It clearly indicates that the franchisor wants to provide the franchisee with the right to operate the franchise location, and the franchisee wants to open a franchise site. 

2. Franchise Grant 

The foundation for the agreement is substantially expanded upon under the "Grant of Franchise" section. It occurs when the franchisor gives the franchisee permission to use the franchise's trademarks and approved operating procedures in conjunction with the launch and management of the particular franchise. Furthermore, it forbids the franchisee from offering any goods or services that haven't received prior authorization from the franchisor. 

3. Franchise Charge 

A franchisee must pay a franchise fee up front in order to basically "purchase into" a franchise. It permits them to make money off the franchise's name and operating model while also receiving temporary support from the franchisor. 

4. Designated Area and Franchised Location

The franchisee's franchise location is specified in this section. Additionally, it usually states that a franchisee cannot transfer their rights to a different site without the franchisor's prior written consent. 

5. Training 

A franchisee is required to name a representative who will take on management responsibilities for the franchise site, according to the "Training" clause of a franchise agreement. The general manager will then be expected to enroll in and finish a training course provided by the franchisor. If the franchisor believes the manager has adequate experience, they may in rare situations decide to waive this clause of the contract. 

6. Development Support 

In this case, the franchisor promises to give the franchisee a list of authorized and selected vendors along with an advertising strategy and text prior to the franchisee's grand opening. This section frequently contains a clause requiring the franchisor to send an agent on-site to help in providing staff with further training. 

7. The Operations Guide 

In this part, the franchisor commits to giving the franchisee an operations manual, which is a compilation of manuals, technical documents, and other written resources addressing supply ordering, production, processing, stocking, in-store operating procedures, and marketing strategies. 

8. Royalties 

The amount of ongoing monthly royalties that a franchisee must pay the franchisor is specified in the "Royalties" section and is commonly expressed as a percentage of the gross monthly sales of the franchise location. 

9. Promotion 

The franchisee is required by this clause to seek the franchisor's express, written consent before using any advertising, marketing, or promotional materials for the advantage of the franchise location. 

10. Quality Assurance

The franchisee agrees to maintain and operate their franchise in accordance with the standards and specifications set forth in the operations manual in the "Quality Control" section of the franchise agreement, with the understanding that the franchisor reserves the right to change these requirements at any time. 

11. Term 

The duration of the agreement is specified in this section. 

12. Default and Termination 

According to the "Default and Termination" clause, the franchisor has the authority to give notice and terminate the terms of the contract as well as any rights granted to the franchisee in the event of the following:

●     The franchisee abandons the franchise location for the duration of the agreed-upon grace period.

●     Franchisees experience insolvency or bankruptcy.

●     Conviction for a crime—The franchisee is found guilty of a felony, a particularly morally reprehensible crime, or any other offense the franchisor feels would damage the franchise's image.

●     Failure to pay – The franchisee neglects to make any required recurring payments under the terms of the franchise agreement.

●     Misuse of Marks – The franchisee disregards the franchisor's instructions and rules on the application of the franchisor's trademarks.

●     Unauthorized Disclosure: The franchisee gives any unauthorized person access to the franchisor's trade secrets.

●     Repeated Non-Compliance – The franchisee gets more than two reminders from the franchisor that they are in breach of any clauses in the contract.

●     Other — The franchisor identifies any further justification they deem adequate to justify the agreement's termination. 

13. Restrictive Covenants 

This provision prohibits franchisees from running any rival companies both while the agreement is in effect, and after it expires or is canceled. 

14. Insurance 

A franchisee is required under the "Insurance" provision to obtain and keep records of specific insurance policies, often including:

●     A franchise location's full general liability insurance

●     Auto insurance for any person with a license to drive on the franchise's behalf

●     Employees' worker's compensation and unemployment insurance

Franchisees frequently demand that they be listed as extra names insured on all of these policies. 

15. Governing Law 

This section provides that the laws of the state in which the franchise location is created shall govern the interpretation of the provisions of the franchise agreement and the resolution of any disputes between the parties. 

16. Alteration 

The agreement may only be updated with the full, written approval of both parties concerned, as stated in the "Modification" section. As long as the changes are non-arbitrary and made to better, promote, or protect the marks and quality of the franchise's licensed methods, the franchisor is permitted to unilaterally and without opposition modify the standards, operations techniques, and marketing policies specified in the operations manual. 

18. Date of Effect 

According to this clause, the contract is not binding unless the franchisor accepts, dates, and signs it. 

19. Attorney fees 

This provision mandates the non-prevailing party to pay the prevailing side's legal expenses paid in any litigation or arbitration, should there be a dispute between the franchisor and franchisee. 

20. No Waiver 

According to the "No Waiver" clause, neither the franchisor nor the franchisee may renounce their legal options in the event that the other party violates the contract. 

21. No Right to Set Off 

According to this clause, the franchisee is not permitted to offset any royalties they owe the franchisor. Additionally, it states that the franchisee cannot refuse to pay the franchisor any money due to it because they believe the franchisor has not performed as promised. 

22. Invalidity 

The "Invalidity" provision in a franchise agreement stipulates that the agreement must be adjusted if a court declares it invalid, which normally means that the agreement or its purpose is judged illegal in some way. The agreement will be deemed to have been amended once the modifications are made and will be regarded as such. 

23. Notices 

This provision requires that any notices provided under the agreement be made in writing and sent through certified mail with a return receipt requested, shipped overnight, or delivered to the address mentioned in the agreement or to a location that is mutually understood by the parties. 

24. Signatures 

This one should go without saying. It is the point where the conditions of the agreement are expressly accepted by both parties. 

You need to have a thorough grasp of these contracts and what they include, regardless of whose side of a franchise agreement you're on. Make sure you understand what you're signing when you sign a franchise agreement since they are among the most crucial elements that determine the nature of the franchisor-franchisee relationship.