A successful franchise business model depends on the franchisor and franchisee meeting their obligations. The agreement between these two parties is often complex, so having everything in writing is critical. This is where the franchise agreement comes into the picture.
A franchise agreement is a legally binding document that outlines both parties’ terms and conditions. Several key points should be meticulously considered when drafting or reviewing a franchise agreement to ensure clarity, fairness and legal compliance.
Duration of the agreement
The agreement should specify when the franchisee will be permitted to operate under the franchisor’s brand. This includes the initial term and any conditions under which the contract may be renewed.
Fees and royalties
Details regarding the initial franchise fee, ongoing royalties and any other fees required by the franchisor must be clearly outlined. This section should include payment schedules, methods, and whether fees are fixed or variable based on performance or other criteria.
Territory
This section governs where the franchisee can operate and whether the franchisor reserves the right to open additional locations or grant franchises within the same territory. Clearly defining the territory helps prevent conflicts and competition between franchisees and the franchisor.
Training and support
Franchisors typically provide initial training and ongoing support to ensure franchisees operate their businesses effectively and in alignment with the brand’s standards. The agreement should detail the extent of training, support services provided and any costs to the franchisee for these services.
Brand standards and operational requirements
The agreement must detail brand standards, including using the brand name, trademarks, proprietary information, marketing practices and operating guidelines. Compliance with these standards is critical for protecting the brand and ensuring a uniform customer experience.
Products and suppliers
Franchisors may require franchisees to purchase products, supplies or services from approved suppliers or directly from the franchisor. The agreement should specify these requirements, including any restrictions on buying goods from outside sources.
Termination guidelines
The agreement must outline the conditions and process for termination. It should also include any obligations upon termination, such as de-branding and ceasing operations.
Because these agreements are often complex, it’s critical to thoroughly review the unique terms of any contract before signing. It may behoove both parties to have the agreement checked by someone familiar with these matters to better ensure that everyone’s interests are properly safeguarded and clearly addressed.