The Franchise Agreement
You've just finished attending Discovery Day and you like what you've witnessed in this final installment of the franchise courting process. You've decided this is the franchise for you. You sit down with the franchisor at the end of the day and he brings the franchise agreement to the table. There are a few things you should know.
The franchise agreement is essentially a legal document between the franchisor and you (the franchisee). It is a legal binding agreement. It explains in detail what the franchisor expects from you, as a franchisee, in the way you operate every facet of the business. There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business.
Every franchisee is required to sign the franchise agreement, and the franchisor will also sign the document. A word of caution, a franchise agreement is a binding legal document and you may want to have a franchise attorney review it on your behalf prior to signing.
Now, more about what you will find in the pages of the franchise agreement. Here are 10 fundamental provisions outlined in some form or fashion in every franchise 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.
The franchise agreement will go into detail to explain more about the franchisee/franchisor relationship. It will include detailed information regarding proprietary statements and outline things like site maintenance and upgrade requirements.
Read and review this document and have it examined by legal counsel with franchise experience. You want to be informed before you sign a franchise agreement. Much like a marriage, you want this relationship to be long-lasting.
8.1: Signing With A Franchise
8.3: Financing Options