A franchise agreement is a document that outlines the franchisor’s terms and conditions for a franchisee, and it’s usually legally binding. Every franchise abides by these terms that are outlined in a written agreement between two parties. The franchise agreement is made at the same time the individual decides to join the franchising journey.
Since a franchise contract or agreement can be very complicated, it’s essential to have a reliable attorney to draft them up. Luckily, California Franchise Attorney has years of experience working with the franchise industry.
With that in mind, here’s everything that a person would need to know about the franchise agreement.
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Franchise Agreement Requirements
Here are three general guidelines for an appropriate franchise agreement
The franchisee’s business is associated with the franchisor’s brand. In addition to that, the franchisor and each of their franchisees are sharing a common brand.
The franchisor should provide significant assistance to the franchisee and how to use the brand to run the business. Because the franchisee is an independent contractor, their control over the brand does not include human resources of the franchisee, and it does not extend to help the franchisee manage the operations of business on a daily basis. The main objective is that the franchisee meets the requirement of the brand on a daily basis.
The franchisor receives a fee from the franchisee for the right to operate the business using the franchisor’s trademark. The initial fee or a continuing fee is usually around $500, which is adjusted annually under the changes of the law.
Related: Franchising Basics: The True Cost to Open a Franchise
Franchise Agreement Rights and Obligations
A franchise agreement is a license that provides the rights and obligations of the associated parties, which is the franchisor and the franchisee. The agreement is created to protect the franchisor’s intellectual property, and to ensure that their brand is operated in the appropriate manner that the franchisor has indicated in the agreement.
Even though everything is written in the agreement, it is meant to last at least 10 to 20 years. That means the franchisor needs to find ways to grow and expand the brand as well as making changes to stay competitive with consumer trends.
franchise agreement will also include an initial franchise fee payable when the agreement is executed and on-going payments or royalties typically based on a percentage of revenues from the franchised business.
The agreement should also be flexible enough to allow the franchisor to make particular modifications in response to the franchisee’s specific needs.
a good and proper franchise agreement should be written in plain English, not too long and one-sided and should be capable of understanding without having a lawyer interpret parts of it.
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What to Do Before Signing a Franchise Agreement
The FTC requires that franchisors offer franchisees a pre-sale FDD, which is the franchise disclosure document. This document provides franchisees with essential information that is required for purchasing a franchise. The document should include the risk and rewards as well as how the franchise compares with other investments that are out there.
Keep in mind that the franchisors are required to provide the FDD to the franchisee at least 14 days before signing it. If the franchisor decides to make any specific changes to the agreement, it must allow seven days for the franchisee to review the completed agreement before signing it.
Usually, these agreements are very long and detailed, so it is essential to provide an ample amount of time for the franchisee to read through everything and to have a thorough understanding of it. This is why it’s vital to have experienced lawyers and other advisers like California Franchise Attorney for advice and consultations.
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Basic Elements of a Franchise Agreement
Here are some basic elements that the franchise agreement has to deal with.
Overview of the relationship:
The relationship involving the franchise agreement includes the owner of the intellectual property, parties in the contract, and the overall obligation of the franchisee to run the business following the brand’s standards and guidelines.
Duration of franchise agreement:
The duration involves the franchisee’s successor rights to new agreements, length of the relationship, and the need to upgrade the franchisee’s location.
Initial and continuing fees:
The franchisee usually pays the fee to the franchisor for entering into the business. The agreements also include several fees, and most franchise systems would offer payment to a brand or advertising fund that is used by the franchisor to market the brand to the public.
Related: How to Start a Franchise in 15 Easy Steps
Not every franchise agreement provides the franchisee with an exclusive territory. Franchisors need to deal with reservation of their rights within the franchisee’s territory, which includes sales over the internet and alternative distribution sites.
Usually, franchisees will find their own location and develop the business according to the franchisor’s guidelines. The primary role of the franchisor is to approve the site that the franchisee has chosen so that they can begin the operation of the business.
Training and Support:
Franchisors usually provide pre-opening support, which includes supply chain, quality control, training, headquarter support, and field.
Use of intellectual property:
The IP is the most valuable asset in the franchise system and will continue to change and operate as the system evolves. The agreement indicates what a license to the franchisee is and how they can use the IP as well as the rights of the franchise or to upgrade the system according to the changes of the franchisor’s operating manual.
The franchisor will determine the advertising commitment and what fees are required to pay towards these costs.
The franchise agreement will indicate the minimum insurance a franchisee should have before opening the business based on the terms of the agreement.
The franchisor will indicate the type of records that the franchisee will need to maintain; software that the franchisee can use, and the rights to audit and access certain information.
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In order to create the proper set of franchise agreements, each part of the elements needs to be evaluated by a lawyer. Luckily, Rod Hatter & Associates is experienced at both drafting and reviewing franchise agreements and the FDD.
With the proper agreement, anyone can start their exciting franchise journey today!!
Related: What Is The Difference Between a Franchisor and Franchisee