A franchise agreement outlines the rights and obligations of the franchisor and franchisee to sell or use a company’s intellectual property and system of operations. Fundamentally, a franchise agreement describes how the franchisor and franchisee will work together.
As a potential franchisee, you must ensure your franchise agreement discloses all the relevant information about the franchise. It should contain the basic elements below.
A franchise agreement should contain a preamble that explicitly identifies the franchisor and franchisee. It legally defines the basis of your business relationship.
Grant of rights
The franchisor must grant you the rights to use their intellectual property. You should have the legal, restricted and nontransferable rights to use the franchise’s trademarks and system of operations within the duration stipulated in your agreement. It does not mean you own the intellectual property, only that the franchisor has granted you the rights to use them.
Allowing more than one franchisee to open the same franchise in one location can be unfair. You would compete for the same customers without a competitive edge as you offer the same product or service. The franchise agreement should define your right to operate in a certain area and be specific about your territory’s boundaries. You should also be aware if you have exclusive rights to the territory.
The franchise agreement must cover all the fees the franchisee must pay the franchisor. It must account for initial costs, ongoing fees and recurring payments in the form of royalties or marketing fees.
Advertising and marketing
Franchisors must establish the marketing standards of their franchise so that the franchisees can uphold these standards. A franchise agreement should describe the responsibilities of the franchisor and franchisee in promoting the brand to increase sales and brand awareness. It is essential to preserve the franchise’s uniformity and consistency.
Quality control measures
Quality control goes hand and hand with the obligations of the franchisor and franchisee in starting the franchise and ensuring its success. The franchisor may be only responsible for supporting the franchise launch, but they can also continue to monitor and evaluate the franchisee’s performance. They should provide adequate training and operational guidelines.
Termination and breaches
As in any contract, there should be a provision in your agreement on how you will address disputes. It must specify the rights of each party to end the agreement when there is negligence or if one party fails to deliver their end of the deal.
As exciting as it is, starting a franchise comes with legal complications. You should understand all the elements of your franchise agreement to ensure your protection and compliance.