The franchise agreement is the legal document between the two parties, one is the franchisor and another is the franchisee. In the franchise agreement, the franchisor is given or granting legal rights to the franchisee to establish a franchisor brand outlet and do all operations in that outlet. In this franchisor will give license, trademarks, business system, supply chain services when the selling of the products from the outlet, etc things to the franchisee.
It is an important document for both parties and this agreement is for multi-years and few of these pints must be included in the agreement, these are mandatory. Like:
- Fee details and fee schedule
- Trademark Name
- Legal Terms of the Franchise
Where will the franchisee outlet be?
According to the franchise agreement, all the rights are given to the franchisee to use the franchisor property to open the outlet and run the business. The franchisee is having very little space to expand according to wish because they get very specific and tight rights are granted and accordingly they have to work. Every brand is having a set of their own way to run the franchise outlet and according to their way, a new franchisee has to work. The only choice is for the franchisee is to use the property and display the things according to you. It is not important that the franchisor is from the United States and you are starting the franchisee in India. You are free to do the things but you need to meet the brand standard also.
What type of information in the Franchise Agreement
The franchisor will provide this agreement to the franchisee before taking any amount of money. The Federal Trade Commission (FTC) requires franchisors to disclose 23 relevant points which are as follow:
- Information about the franchisor.
- Financing information
- Items that are included in the franchisee
- Area or region was given to the franchisee.
- Overview of the franchise agreement what types are included.
- Fee structure of the franchisor
Checklist for the Franchise Agreement
The FTC strictly imposes some rules and regulations on the franchisors for the disclosure of the form to the franchise. This document form must be delivered to the franchisee. The disclosure document form is mandatory and the copy of the franchise agreement. A copy of the document must be delivered within 14 days before the final contract is signed. This process will help you to review the agreement and understand it.
Trademark and Property
A franchise agreement helps to know that the franchisor has granted the franchisee to use the franchisor’s name, trademarks, service marks, logos, slogans, designs, and other branding things. Also, the franchisor is allowed to use property franchisors. This contractual license is proof that there is an agreement between these two parties. Without this property, usage is not possible.
Support and Training
When the agreement is signed then the franchisor will provide the training and support services to the franchisee so that they can match the standard of the brand. This will create a problem for the opening of the outlet and this also specified in the agreement also.
In Some agreements, few criteria are set by the franchisor to advertise the brand, and sometimes it takes more than the wish of the franchisee. The franchisor is totally free and all the work done by the franchisee.
In this franchise agreement will set and specify the contract duration. For long we require the contact. It can be 10 years and for 20 years. Dep[ends of the franchisee and franchisor wish. It is always good to have 10 years contract and if you think it is good for you and for the investment and you are getting profits in that then you can renew the contract for 10 years.
Every franchise agreement must be in written and the agreement will be signed by both parties and the copies will be provided to both parties.
The agreement will give an overview of the franchisee and also specify whether the franchisee is in the exclusive area. It will roughly explain the region of the outlet. The territory is the important part of the outlet and also it tells whether you will get profit or not.
The franchise agreement fee of the franchise clause will be written. This fee is given to the franchisor. All franchises charge some amount fees which include the initial franchise fee, as well as a monthly fee, royalty fee, marketing fee, and any other fee. If the franchisee is not able to give a fee on time then the franchisor will charge a late fee and interest on that fee. This late fee clause will be specified in the Agreement document.
Each franchisee has the right to select its site where he/ she is going to invest. but the franchisor also has the right to approve the location because its brand goodwill is concerned. The franchisee must follow the franchisor’s standards for developing the outlet, and few things need to be taken care of like choice of furniture, fixtures, landscaping, and signage that meet the franchisor’s standards.
The agreement also has a clause to cancel the agreement early. The only franchisor will have the right to cancel the agreement in between and this termination right is not given to franchisees. Due to these reasons, the agreement any is cancelled early like fails to pay a franchise fee, filing bankruptcy, or fails to repair the outlet.
Limitations upon Termination
When the termination of the agreement happens early then there is a list of obligations for the franchisee. which includes the obligation to stop using the brand name, take down signs, return the operations manual, and pay all amounts due.
Franchise agreements also have an arbitration clause that specifies if any dispute occurs then need to go to the arbitration. You have to go to a body such as the American Arbitration Association.
The franchise agreement will also have an insurance clause also. For the maintenance of the franchise and also certain insurance coverage.
Records and Audits
As the franchisee, you need to maintain records and provide regular financial and operations statements to the franchisor. Because you need to give the royalty payments and these payments depend on the percentage of gross sales, reporting accurate sales numbers is especially important. Some times franchisor asks for additional information like tax returns and to audit your records.
If your franchise is a restaurant or retail premises where consumers visit, franchisees have to maintain the premises. The franchisor has reserved the right to check the outlet and to make sure that they are well maintained. It is important to renovate once every 5 to 10 years. Renovation expense is replacing the layout of the premises, furniture, or fixtures to meet the franchisor’s standards.
Transfer and Re-Sale
In franchise agreements, there is also a clause to transfer the franchisee. The franchisor has the right to transfer the franchisee’s ownership interest in the franchise relationship to buyers. It is up to the franchisor to whom he/she sells the franchisee.
No Industry Standard for Agreement
There are no such standards are set to form the franchise agreement because Every franchise brand creates its own contract documentation. Most have common types of provisions, but their words are not the same.
There are chances to negotiate the franchise agreement. A franchisee always tries to negotiate the agreement. It should not like the only single-party rules and regulations that need to follow. Franchisees need to talk about their perspectives also.
Review with a Lawyer
Before signing the agreement you need to review the agreement with the lawyer because a lawyer will explain to you each and every provision of the agreement. Also, the lawyer tells you the plus and negative points of the agreement.