A Guide: What Is A Franchise Agreement?

Franchising has been a progressively followed business model among companies in all industries to expand their operations. And because it gives individuals a comparatively secured chance at entrepreneurship, there have been enthusiastic takers of the franchises in the market.

As per the estimates, there are some 753,700 franchise establishments in the USA in some 2,500 different businesses(read about top 50 brands here), outputting 670 billion U.S. dollars while employing 7.5 million people. The most popular segment of the franchise industry is quick-service restaurants, which comprise over 241 billion dollars of the industry’s total output, followed by business services with 121 billion dollars output.

A franchise is a legal and contractual agreement between a company (franchisor) and individuals (franchisees) to expand the business operations, benefiting both parties. The franchisor here provides individuals with the right to sell its offerings under its brand name and trademark using its business operating model. In return, the franchisees pay the franchisor an agreed amount in fees and royalties.

A Franchise Agreement is the most important document when you buy a franchise. It lays down the master rules before you start a franchise in the USA, governing the relationship of two separate entities working together for mutual benefit.

Franchise Agreement- A Tie Between Franchisee And Franchisor

A Franchise Agreement is a legally binding contract between the franchisor and the franchisee. To take ownership of a franchise, an individual must sign the franchise agreement. You must know that there is no set format of the franchise agreement, and it is different from each industry to each brand.

Before you sign a franchise agreement, It is advisable to consult your lawyer as it lays down all the rules on which the franchise business will run. Franchisors must give a minimum of 14 days to the franchisee to review this document and consult a lawyer before signing and submitting it to the franchisor.

A franchise agreement defines the scope of the relationship between the franchisor and the franchisee by defining both parties’ benefits and restrictions.

This agreement gives better control of the business run by the franchisees to the franchisor, which in turn helps avoid conflicts and creates a standardization on how a franchise should work.

The Franchise agreement is also a way to manage the brand. It details the requirements from the franchisee in using the brand indicia while also detailing the penalties for violation and mismanagement of business branding, which protect the brand reputation and image.

Why Is a Franchisee Agreement Important

The franchise agreement defines all the relationships between the franchisor and the franchisee. Since there is no such thing as a standard Franchise Agreement, which means that every franchise agreement will be different, it is essential to understand this document clearly as based on it are the future possibilities of a franchise business.

The franchise documents cover all aspects of the working of the franchisee. It includes all the commercial aspects of the business, the legal aspects of working with a third party, and many other necessary practical considerations that protect both the brand and secure the rights of the franchisees.

Commercial Aspects of the Franchise Agreement:

The franchise agreement has to state all the franchisee’s financial obligations in the business. It says the fees and royalties that the franchisee has to pay, along with other costs that have to be incurred by the franchisee. The commercial aspects of the franchise document could determine how much a franchise owner can make; therefore, it is imperative to understand it before committing to a franchise relationship. It also analyzes FDD item 19 as it discloses expected returns on the franchise.

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Legal Aspects of the Franchise Agreement:

The franchise agreement defines the legal rights of both parties. Upon signing the agreement, the franchisee gets the right to use the brand name, signage, logo, and all other intellectual property. It also states the number of years for which the franchise can be taken and renewed or terminated.

A franchise agreement must comply with the Consumer Protection Act (CPA) and the act’s regulations that apply to franchising.

Practical Aspects of the Franchise Agreement:

Various practical considerations are covered under the franchise agreement that ensures running the business smoothly. Some of these aspects are clauses that prevent speculative practices, training and support provided by the franchisor, other assistance provided by the franchisor like marketing, audit and I.T. support, and maintenance and renovation by the franchisee.

The document is the referral point should any dispute arise between the parties. Therefore it is essential to consult a lawyer or ask questions with franchisors before signing the Franchise Agreement.

What Are The Important Things That Comes Under Franchise Agreement

A franchise agreement is a commitment between the franchisor and a franchisee, and the relationship between the two follows the format of this document. The aspects of this association are mentioned below that are covered in a franchise agreement.

  • The Grant of Franchise: A franchise document is a license for a franchisee to operate the franchisor’s business using its trademark, business system, and intellectual properties. It defines the number of years for which a franchisee has the right to operate this business. A franchise is commonly granted for ten years, but the time duration may vary from brand to brand.
  • Defining Location or Territory: The franchise agreement designates the territory or location of the franchise on which she may operate. It also explains the franchisees’ exclusivity right to a territory, if there are any. The agreement may differ in the case of Area Development franchise agreements (also called Master Franchises).
  • Right to the use of Brand name, Signages, and Trademarks: A franchise extends the parent company’s business. By signing a franchise agreement, a franchisee can use its brand name, trademark, logos, slogans, or other branding indicia. Without the franchise agreement, the use of these will be an infringement.
  • Operations: The agreement defines how a franchisee will follow the systems and procedures of the brand in its work. It will also lay down rules of purchase of supplies and equipment, its maintenance, and the maintenance of a single unit or multi-unit if there are any. The system of audit is also specified in the franchise agreement.
  • Training And Support: The franchise agreement also states the details of training and ongoing support provided by the franchisor to the franchisees.
  • Franchise Fee and Investments: The costs to the franchisee with the initial franchise fee have to be clearly stated in a franchise agreement.
  • Royalties and other Fees: The franchisees pay the franchisor an ongoing royalty, usually a percentage of the sales and paid monthly. The royalty that a brand charges differs hugely from company to company. Some companies like Chick-fil-A charge as much as 50% of the sale value as royalty, while the most popular brands in the QSR industry, Papa John’s and KFC, charge 4%. The structure of royalties to be paid is stated in the franchise agreement.
  • Advertising and Marketing Support and Expenses: The franchise agreement defines the marketing and advertising fee that the franchisee bears. The term used to define the marketing fee is usually “brand development charges,” and there is usually a monthly amount charged from the franchisee for the expense incurred by the company regarding brand development charges.
  • Covenants and Non-Competes: The franchise document also states restrictive covenants and non-competes that prohibit franchisees from taking part in competitive businesses during franchise tenure and even after the term of the franchise tenure.
  • Legal Rights: The franchise agreement states the jurisdiction under which the franchise agreement is governed. Usually, it is in a state which has the company’s headquarters. The document also states the various courts and entities that hold jurisdiction on the franchise-related issue and where the franchise could go should any dispute arise between the parties.
  • Renewal Rights and Cancellation Policies: The document describes how a franchise can be renewed or terminated.
  • Exit Strategies: Every company has its exit policies for its franchisees. It may include the company’s consent at the time of sale of the franchise to a third party or the right to the first refusal or buy back from the company. This is also a part of the franchise agreement.

Franchise Agreement Of Some Of The Popular Brands are:

You can see attached document pictures of some of the very famous franchise chains. Food franchises are the most popular franchises contributing almost ⅓ share in the franchise market. Some of the well-known brands with structured franchise agreements are:

Conclusion

The franchise agreement is an essential document in the franchise model of working. It lays down all the terms and conditions on which the scope of the franchise business depends. At one end, it protects the franchisor’s business interest by detailing its rights and dues over the franchisee; on the other hand, it helps the franchisee by stating the obligations of the company in providing the franchisee with the training, support, and brand assets that it can use to run its unit. Hence it becomes even more critical to understand the agreement properly before signing and completing it.

The ultimate goal of an entrepreneur is to earn money. So at Fransmart, we provide you assistance in finding the kind of franchise that would best suit your qualifications and services in understanding the franchise agreement so that you can get the maximum benefit of your investments. Our 10 step approach is the easiest way to own a franchise in the U.S.

We have done in-depth research on more than 100 franchises and can tell you why you should not buy particular franchises.

Fransmart has made a list of some of the best combinations of financially rewarding and award-winning franchises with low risks involved with our team’s expertise and knowledge. Please check to see if any of these could be the business for you!

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