Understanding the Franchise Agreement
Understanding the Franchise Agreement
A franchise agreement is a contract, which is entered into between the franchisor, and the franchisee and sets out the relationship between the franchisor and franchisee. The franchise agreement will usually appear biased towards the franchisor, which is necessary for the franchisor to maintain control over the franchise system. A franchisor is risking its name and reputation on the franchisee’s performance, so it is only fair and reasonable that bit has the right to place certain obligations on the franchisee. Consistency amongst franchise units is a cornerstone of successful franchising – and consistency requires compliance.
Despite common beliefs, there is no such thing as a standard franchise agreement, and no two franchise agreements are alike. This is understandable because franchises cover many types of business in many different industries and have different characteristics. A franchise agreement will be just one of the documents that a franchisee will be required to sign. These may include a non-disclosure/confidentiality agreement, offer to purchase agreement, lease (or sublease) agreement, and a security agreement.
What is Considered Negotiable?
There are differing opinions regarding just how negotiable a franchisee agreement can be. Franchise agreements can generally be considered non-negotiable, except for items such as location, exclusive territory and opening date. A franchisor may negotiate a point that is specific to a particular franchisee, but will be unwilling to make any changes that will weaken or violate the franchise system. There may be more flexibility, or opportunity for negotiation with a new franchisor whose agreement is still evolving and has not yet stood the test of time.
What’s Included in a Typical Franchise Agreement?
A typical franchise agreement will include:
* the parties to the agreement (the name, address and other details of the franchisor and the franchisee, and any other parties to the agreement)
* the business structure or format being licensed to the franchisee, which is usually referred to as the “System”. The System typically includes: trade names, trade-marks (e.g. logos and slogans), trade secrets, patents, copyright, designs, procedures, techniques, manuals and the products and/or services which are the subject of the franchise
* the term of the and any renewals or options to renew the franchise at the end of the term;
* the fee or fees payable by the franchisee to the franchisor, some of which may be one-time fees (e.g., the initial franchise fee), and some of which may be ongoing fees (e.g., a royalty payment, which is generally a percentage of the franchisee’s gross sales)
* any territorial limitations on the franchise
* any training and/or re-training requirements
* obligations on the franchisee to abide by the franchisor’s System (and the consequences of failing to do so)
* any obligations on the franchisee to modify the System at the request of the franchisor
* any obligations on the franchisee to introduce the franchisor’s new products and services, and any obligations to cease selling particular products and services
* any obligations on the franchisee to purchase products or services from the franchisor or from approved suppliers
* any obligations on the franchisee relating to the hours and days of operation of the franchise
* any obligations on the franchisee to advertise or promote the franchise locally or regionally, or to contribute to the franchisor’s advertising or promotional program
* any obligations on the franchisee to participate in special promotions (e.g., to redeem promotional coupons)
* any obligations on the franchisee regarding the maintenance of financial records, and any obligations to make these records available to the franchisor
* any obligations on the franchisee relating to insurance policies
* any restrictions on the sale of the franchise by the franchisee
* the method or methods by which a franchise may be terminated by the franchisor, and any continuing obligations on a franchisee after termination or expiration of the franchise agreement
Norman P. Friend
President
Franchise 101 Incorporated.
