Franchise Agreement: The Definitive Guide (2021) – Contract Bazar

Franchise Agreement - Contract Bazar

When a company lacks funds and employees that it needs to grow and develop into new arenas and geographic locations, its growth is impeded. However, franchising can come as a rescue wherein the parent company grow as the franchisee brings in both, giving a huge push with a lesser level of risk involved

At the employee front, having impeccable management performance involving highly dedicated and motivated individuals can enhance the competence and efficiency of the company manifolds. Franchising can help bring in such managers for every outlet who are largely responsible for the competence and success of their franchise, and thus, keeps a continuous check on the performance and overall success.

What Is a Franchise Agreement?

A legal written agreement outlining terms and conditions that the franchisor lays down for the franchisee, stating obligations for both the parties laid down to avoid any future contingencies which have to be signed by the party entering into the franchise agreement.

A franchise agreement is legally binding for both the franchiser and franchisee along with the corporate entities involved as it states the terms to be adhered to in case of any future contingencies or in case a termination of the connection is required as it lays do’s like how to run the business, actions and things to be prioritized over others for the successful running of the franchise and don’ts which are covered under non-compete and confidentiality clauses which seek to protect the franchisor who lays down the franchise agreement about production processes, product, and proprietary decisions.

With the existing franchises and the agreements in place, franchisors over the years realized and now follow a simple, synchronized approach for having any new franchisee coming on board. For this, they mostly use a single contract with the same terms and conditions for every franchise for the sake of uniformity In most cases, the new enterprises looking to be franchisees of any sturdy organizations like McDonald’s are looking to be happily on board to be able to lead stable and profitable ventures and thus, willingly accept the franchise agreements in place set in place once they’ve resolved all the doubts and queries by seeking clarifications and addressing the points they are doubtful about.

However, the franchise agreement usually comes from a vantage point of the corporation issuing the franchise, i.e., unilateral in nature they are looking to protect their name, quality, and safeguarding the enterprise as a whole. This, the corporations govern by their existing models as they forward to corroborate the same, and hence, the franchisees willing to work according to the models should only sign up for it. However, the franchisor needs to act with caution if a party seeking franchise agrees blindly to all the terms and conditions and is willing to negotiate everything by forgoing its own interests.

What under the franchise agreement?

A legal written agreement outlining terms and conditions that the franchisor lays down for the franchisee, stating obligations for both the parties laid down to avoid any future contingencies which have to be signed by the party entering into the franchise agreement.

A franchise agreement is legally binding for both the franchiser and franchisee along with the corporate entities involved as it states the terms to be adhered to in case of any future contingencies or in case a termination of the connection is required as it lays do’s like how to run the business, actions and things to be prioritized over others for the successful running of the franchise and don’ts which are covered under non-compete and confidentiality clauses which seek to protect the franchisor who lays down the franchise agreement about production processes, product, and proprietary decisions.

 

  • Franchise Disclosure Document (FDD)

The franchise disclosure document (FDD) is a legal document that entails the disclosure of essential information regarding things important for potential franchisees as due diligence before the sale prior to making any major investments. Thus, it paints for the franchisees a very lucid picture giving them a very comprehensive idea of business relations among the franchiser and the franchisees.

  • Master Franchise Agreement (MFA)

It is a legal document that gives the Master Franchisee the entitlement for ownership and operation of more franchises, sub-franchisees, franchises of other businesses during a given day and under a given location. It is suitable for the international development of business, further franchising, transfer of control of power, and enforcement of the same as per the standards in which the master franchisee holds expertise.

  • Retail franchise agreement (RFA)

In most cases, it bodes well for the retailers to take complete charge of sales for their products. However, when the product branding becomes indispensable for the sale of the products, covering several issues pertaining to franchising, a franchising agreement called a retail franchise agreement is set in place. It is said to be well-crafted to be ideal for all small businesses and even attract them to certain ventures to own a franchise and comprehensive for the big ones.

Why should businesses (especially small businesses) use franchise agreements?

For small businesses, the greatest impediment to their growth is lack of funds and understaffing than what is required. Without these problems, companies can grow at a very fast pace. Franchising can help small companies and MSMEs tackle these problems companies expand much more quickly than they could otherwise. Due to incoming branch managers for every franchise, better management will lead to better efficiency and hence, growth due to constant inputs. A franchise can also help businesses expand to an international level which may ultimately help them reap economies of scale reaping a higher level of profits with lesser risks involved.

Essential elements of a franchise agreement

There are essential elements to every agreement. Some of the essentials elements of the franchise agreement are as follows:

  • Understanding the relationship between the franchisor and franchisee: It is essential to get a hang of the relationship that exists amongst the participating parties in the agreement which sums up the obligations and ways of operations as the other party perceives.

 

  • Intellectual property safeguards: Under the franchise agreement the franchisor seeks to protect the intellectual property under the franchise system, as it is their most prized asset. It states guidelines for how franchises can use it over time.

 

  • Assigned territory: a franchise agreement does not necessarily grant franchisees exclusive territory to perform operations however, to deal with rights that they can practice in the territory specified, like distribution and sales network. Thus, obtaining territory assigned is imperative to lay clear territorial boundaries to avoid any conflicts. Also, the selection of sites and meeting designs and brand standards must be pre-stated.

 

  • The franchise agreement tenure: under this clause, the parties must take into consideration the length of the agreement and the clauses circling the franchisee’s rights to pursue new agreements, etc.

 

  • Initial and continuing fees: Franchisees generally pay an initial and continuing fee to the franchisor for entering into the system and to remain as a franchisee. Agreements also typically include a number of side fees. Most franchise systems provide for a payment to an advertising or brand fund that is used by the franchisor to market the brand to the public and for other contractually defined purposes.

 

  • The training and support programs: the franchise agreement usually underlines that what all the franchisor needs to provide as support before and after opening with training for employees, supply chains, and overall quality monitoring as per the standards.

 

  • Advertising for franchises: The party giving franchise has to reveal an advertising commitment and the fees franchisees are required to pay as a part of its total costs.

 

  • Overseeing records and monitoring the records of: Right at the beginning, the franchisor lays down guidelines that clearly state how it requires the franchisee is required to maintain the records and further rights like the software to be used and access to other such amenities

Why Contract Bazaar?

Besides all the above-mentioned essential elements, the franchise agreement must also take care of the rest of the major and trivial issues like personal guarantees, termination rights, dispute resolution, local governance, and law requirements. With our expertise and highly efficient round-the-clock technical and client support, we at Contract Bazaar strive to make your life easier and much simpler by designing custom franchise contracts to suit your personal needs.