Franchisor-franchisee relationships don't start vaguely and arbitrarily. Establishing a franchise involves more than a handshake, trust, good intentions, and an unspoken understanding of what both parties expect out of their relationship. It requires a record of clear, legally documented protections and obligations to set things in motion.
That record is referred to as a franchise agreement. Let's take a closer look at what that term entails and what you can expect to see on one.
What is a franchise agreement?
A franchise agreement is a legally binding contract that establishes a relationship between a franchisor and a franchisee. These documents allow a franchisee to establish a franchise location — along with providing the rights to use franchise-specific resources like branding, business models, and supply sources.
Like any other contract, a franchise agreement is designed to establish definitive terms for the relationship between the parties involved. These kinds of documents feature protections and obligations that suit both franchisors and franchisees.
Franchise agreements dictate the parameters within which franchisees are allowed to operate and detail any financial obligations they have to their franchisors. They also typically offer more protections for franchisors than franchisees.
In exchange for their compliance to an agreement's terms, franchisees are afforded legal assurance that they'll be equipped with the resources and support to operate a franchise location.
Let's take a more thorough look at what you can expect to see on a franchise agreement.
Sample Franchise Agreement
1. Basis for Agreement
This section recognizes both the franchisor's and franchisee's intentions and what each party will get out of the agreement. It explicitly states that the franchisee desires to establish a franchise location and the franchisor desires to grant them the right to operate it.
2. Grant of Franchise
The "Grant of Franchise" section essentially expands on the basis for agreement. It's where the franchisor grants the franchisee the right to use the franchise's marks and licensed methods in connection with the establishment and operation of the franchise in question. It also dictates that the franchisee can't sell any products or services that aren't previously approved by the franchisor.
3. Franchise Fee
A franchise fee is the upfront payment a franchisee pays to essentially "buy into" a franchise. It lets them use the franchise's system and name for their own financial gain — and provides them with assistance from the franchisor for a limited time.
4. Franchised Location and Designated Area
This section dictates where the franchisee's franchise location will be. It also typically specifies that a franchisee can't transfer their franchise rights to another location without written approval from the franchisor.
The "Training" section of a franchise agreement specifies that a franchisee must designate a representative who will assume management responsibilities for the franchise location. Then, that general manager will be required to attend and complete a training program offered by the franchisor. In some cases, the franchisor might waive this portion of the agreement if they feel the manager already has sufficient experience.
6. Development Assistance
Here, the franchisor agrees to provide the franchisee with a list of approved and designated suppliers — as well as an advertising plan and advertising copy in advance of the franchisee's grand opening. In many cases, this section includes a stipulation requiring the franchisor to provide on-site services from a representative who can assist with providing employees with further training.
7. Operations Manual
This section revolves around the franchisor agreeing to provide the franchisee with an operations manual — a collection of manuals, technical materials, and other written materials covering ordering of supplies, manufacturing, processing, stocking, in-store operating procedures, and marketing techniques.
The "Royalties" section specifies how much a franchisee needs to pay the franchisor in continuing monthly royalties — typically calculated as a percentage of the franchise location's gross monthly sales.
This section dictates that the franchisee agrees to obtain the franchisor's explicit, written approval for all advertising, marketing, or promotional materials that might be used for the benefit of the franchise location.
10. Quality Control
The "Quality Control" section of the franchise agreement is where the franchisee agrees to maintain and operate their franchise in compliance with the standards and specifications contained in the operations manual — understanding that those stipulations can be changed by the franchisor at any point.
This section sets the time frame the agreement covers.
12. Default and Termination
The "Default and Termination" section affords the franchisor the right to terminate the terms of the agreement and all the rights it grants the franchisee — effective upon notice — upon the occurrence of any of the following events:
Abandonment — The franchisee abandons the franchise location for a period specified in the agreement.
Insolvency — The franchisee becomes insolvent or bankrupt.
Criminal Conviction — The franchisee is convicted of a felony, a crime of particular moral depravity, or any crime the franchisor believes will harm the franchise's reputation.
Failure to Make Payments — The franchisee fails to make any routine payments specified in the franchise agreement.
Misuse of Marks — The franchisee fails to follow the franchisor's directions regarding the directions and guidelines regarding the use of the franchisor's marks.
Unauthorized Disclosure — The franchisee discloses the franchisor's trade secrets to any unauthorized individual.
Repeated Non-Compliance — The franchisee receives more than two notices of default on any terms of the agreement from the franchisor.
Other — The franchisor finds any other legitimate reason they feel is sufficient to warrant the termination of the agreement.
13. Restrictive Covenants
This section disallows franchisees from operating any competing businesses both during the period covered by the agreement and after the agreement has lapsed or been terminated.
The "Insurance" section dictates that a franchisee agrees to procure and maintain evidence of certain insurance policies, typically including:
Comprehensive general liability insurance for the franchise location
Automobile insurance for any employees authorized to operate motor vehicles on behalf of the franchise
Unemployment and worker's compensation insurance for employees
Franchisors often require all of these policies to name them as additional names insured.
15. Governing Law
This section specifies that the terms of the franchise agreement will be interpreted under the laws of the state the franchise location is established in — and any disputes between parties will be resolved in accordance with those laws.
The "Modification" section dictates that the agreement can only be modified with the expressed, written consent of both parties involved. It also states that the franchisor is allowed to modify the standards, operations techniques, marketing policies specified in the operations manual unilaterally and without objection so long as those changes are non-arbitrary and made to improve, promote, or protect the marks and quality of the franchise's licensed methods.
17. Entire Agreement
The "Entire Agreement" element of the agreement specifies that the contract represents a complete and final agreement between both parties. This is intended to protect both sides. It means that the contract takes precedence over any prior agreements the franchisor and franchisee might have made concerning the agreement. It prevents the franchisee from demanding more than what has been specified in the rest of the document.
18. Effective Date
This section dictates that the agreement will not be effective until the franchisor accepts, dates, and signs it.
19. Attorneys' Fees
Should there be a dispute between the franchisor and franchisee, this section requires the non-prevailing party to pay the prevailing party's legal fees incurred in any sort of legal action or arbitration.
20. No Waiver
The "No Waiver" section stipulates that neither the franchisor nor the franchisee can waive their right to bring suit if the other party breaches the agreement.
21. No Right to Set Off
This section dictates that the franchisee doesn't have the right to set off any royalties they owe the franchisor. It also stipulates that the franchisee can't withhold any money it owes the franchisor based on their perception of nonperformance by the franchisor.
The "Invalidity" clause of a franchise agreement states that if a court finds the agreement invalid — generally meaning the agreement or the purpose of the agreement is deemed illegal in some capacity — it must be modified. Once it's been modified, the changes will be considered a part of the agreement as if they were originally included in the document.
This section states that all notices given in accordance with the agreement need to be given in writing, by certified mail, return receipt requested, or shipped overnight to provide the necessary documents at the address specified in the agreement or mutually understood by both parties.
This one is pretty self-explanatory. It's where both parties explicitly agree to the terms of the agreement.
No matter what side of a franchise agreement you're on, you need to have a firm understanding of these documents and what they entail. They're among the most important factors in dictating the nature of a franchisor-franchisee relationship, so make sure you know what you're getting into when you sign one.
Originally published Sep 10, 2021 9:00:00 AM, updated September 10 2021