The Franchise Agreement is a legally binding agreement which outlines the franchisor's terms and conditions for the franchisee. It also outlines the obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed at the time an individual makes the decision to enter the franchise system.
As with any well-written contract, the Franchise Agreement needs to deal with some basic elements including, but not limited to:
1) An Overview of the Relationship. The parties to the contract, the ownership of the intellectual property, the overall obligations of the franchisee to operate their business to brand standards, etc.
2) Duration of the Franchise Agreement. The term of the relationship, the franchisees successor rights to enter into new agreements, the requirement to upgrade the franchisees location, etc.
3) Initial and Continuing Fees. Franchisees generally pay an initial and continuing fee to the franchisor for entering into the system and remaining a franchisee. There are also a host of other a la carte fees that are included in most agreements. Most franchise systems also 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.
4) Assigned Territory. Not every franchise agreement grants a franchisee an exclusive or even a protected territory, and how a territory is established must be defined. Franchisors also need to deal with reservation of their rights within a franchisees territory, including alternative distribution sites, sales over the Internet, etc.
5) Site Selection and Development. Franchisees generally find their own sites and develop them according to the franchisors standards. The role of the franchisor is generally to approve the location found by the franchisee and then approve, prior to opening, that the franchisee has built their location to meet design and other brand standards.
6) Initial and Ongoing Training and Support. Franchisors generally provide a host of pre- opening and continuing support including training, field, and headquarters support, supply chain, quality control, etc.
7) Use of the Intellectual Property including Trademarks, Patents, Manuals. As the IP of every franchise system is its most valuable asset, some of which will change as the system evolves, the agreement defines what is licensed to the franchisee, how the franchisee can use the IP, and the rights of the franchisor to evolve the system through changes to the franchisors operating manual.
8) Advertising. The franchisor will reveal its advertising commitment and what fees franchisees are required to pay towards those costs.
9) Insurance Requirements. Franchise agreements will define the minimum insurance a franchisee is required to have prior to opening and during the term of the agreement.
10) Record-Keeping and the Rights to Audit the Franchisees Records. The franchisor defines the records that it needs its franchisees to maintain in the agreement and in the operations manual, the software they are allowed to use, its rights to access that information including online through the internet, and its rights to audit that information from time to time.
11) All the rest. Some may call it boilerplate, but in well-developed agreements, it is not. Among the myriad other issues contained in the Franchise and other agreement are the franchisee's successor rights, default, termination, indemnification, dispute resolution, resale rights, transfer rights, rights of first refusal, sources of supply, local advertising requirements, governing law, general releases, personal guarantees, roll-up provisions, etc.
In developing a proper set of franchise agreements, each of the elements of the franchise need to be evaluated and decisions made. Prior to having the lawyers begin to draft the agreements, it is essential for the franchisor to first develop its business plan, with all the myriad of issues decided on. For most franchisors it is important that in addition to working with qualified franchise lawyers, they first work with experienced and qualified franchise consultants in crafting their franchise offering.