If you're thinking about developing and expanding your business by way of franchising, then you should have a franchise agreement, which is a legally binding and extremely important document, in place to protect your brand. In principle, it specifies how your brand can and cannot be used.
A franchise is a partnership between a franchisor and a franchisee. The "original" business is the franchisor. It sells the franchisee the right to use its name and idea to sell the franchisor's goods and/or services under an existing branding and trademark.
What is a Franchise Agreement?
A Franchise Agreement is an agreement that is made between the franchisor and the franchisee and must be individually tailored for each franchise concept.
Because each business and industry are so different there is no “one size fits all” format for a Franchise Agreement, however, it is crucial to find a business lawyer who can assist you in professionally drafting a tailored franchise agreement that will not only protect your business but give all parties involved clarity and also peace of mind.
Each Franchise Agreement is different and depends on both the industry you operate in and also your business model.
That said, every Franchise Agreement should contain the following legal points:
Use of Trademarks
When purchasing a franchise, having permission to use well known trademarks is one of the key benefits the franchisee will receive.
This section of the Franchise Agreement will list the lists the service marks, logos and trademarks the franchisee is entitled to use.
Two key points to consider are:
• Is the trademark well known and been in use for a considerable amount of time?
• Are there any restrictions on the use of the trademark by either the franchisee or franchisor?
Location of the Franchise
This section of the Franchise Agreement should cover the exclusive territory or area that has been granted to the franchisee.
A key point to consider here is:
• Do you have exclusive rights in a certain geographical territory or area?
Term of the Franchise
In this section of the Franchise Agreement the specific term or duration of the franchise should be specified.
Key points to consider here are:
• How long does the Franchise Agreement last?
• Is there a probation period?
• Is the Franchise Agreement renewable after it has expired?
Franchisee’s Fees and Other Payments
In this section of the Franchise Agreement you should include everything to do with the financial side of things. This would include all the initial, obligatory fees the franchisee is required to pay.
Key points to consider and include in this section are:
• The initial fee the franchisee is expected to pay and what he/she received for that fee.
• Any royalty or interim payment, what that payment is based upon and when the payment is due.
Obligations and Duties of the Franchisee
This section of the Franchise Agreement should describe in detail what is expected of the franchisee on a day to day basis and should ultimately list the franchisee’s responsibilities.
Key points to consider in this section are:
• Training requirements
• Business Participation Requirements
• Requirements for keeping and submitting adequate records.
If there is a sales target that needs to be met each month then this should also be included in this section of the Franchise Agreement, along with any penalties if these targets are not met.
Restriction on Services and Goods Offered
This section of the Franchise Agreement should describe any restrictions placed on the services or goods offered, including:
• quality of standards required
• if applicable, an approved suppliers list
• again, if applicable approved advertising
• business hours
• pricing structure
Renewal, Termination and Transfer of Franchise Agreement
This section of the Franchise Agreement is very important to include. If the franchisor decides to terminate the agreement due to lack of sales, lack of commitment or even misconduct by the franchisee, if this section isn’t included then both the franchisor and the franchisee could both end up in court.
This section should include:
• The rights and obligations of a franchisee upon termination
• Descriptions about the transfer of the franchise agreement
• Descriptions about the renewal of the franchise agreement
Additional Sections to Consider
Some Franchise Agreements have additional sections that prevent the franchisee from doing certain things upon termination or expiration of the agreement.
This clause prevents the franchisee from setting up a business in the same industry and competing with the franchisor and any other franchisees for a specific time period. This can also be called "non compete agreement,” "non compete clause," or “covenant not to compete.”
This clause forbids a franchisee from soliciting any of the franchise customers they serviced during the whole term of the Franchise Agreement.
The franchisee would be required to turn over their customer list to the franchisor, who would then have exclusive control of said list.
Even if the franchisee started a business that was essentially “non competitive” they would still not be allowed to “poach” any of the customers on the list due to the non-solicitation clause.
As you can see, having a Franchise Agreement in place is critical because it explicitly lays out the obligations required by both the franchisor and franchisee and does, ultimately, eliminate any room for debate or guess-work from either party.
Perhaps no other aspect of the franchise development cycle is as crucial to the success of the franchise system as the franchise agreement.
Finding a business lawyer can be a stressful and time-consuming task. You will need to find a lawyer who is experienced and can deal with a lot of the day-to-day business laws and regulations on your behalf.
You can use a professional company like Mishoura to help you find the best business lawyer for you, saving you a lot of time, effort and research.
After the initial consultation with them they will be able to produce a shortlist of law firms for you to choose from, usually in around 90 minutes, giving you more time to focus on your business.