Setting up Franchise Agreements

WHAT IS A FRANCHISE AGREEMENT?

A franchise agreement is a legal, binding contract between a franchisor and franchisee, where a well-established business gives consent to provide its brand, operational model and required support to another party in order for them to set up a similar business in exchange for fees.

Since a franchise agreement regulates the legal relationship between the franchise company and the franchisee, it is very important to give it a careful thought before signing the paper.

 

FRANCHISE AGREEMENT ADVICE

Here are some of the crucial points that you may need to consider about before you sign the contract.

1. A franchise agreement is usually unilateral in nature and does not allow negotiation.

It may sound a bit unfair, but the main goal of a franchise agreement is to protect the franchise system as a whole, which includes the company brand, the integrity of the operating system and franchisees’ business in the aggregate.

The contract is written in a way that allows franchisors to accomplish this goal the best. Therefore, there are usually many must-do rules in conjunction with the operation of the business in a franchise agreement, of which the franchisors are not willing to negotiate the language.

2. Look at some key clauses in the franchise agreement.

One of the most important clauses in a franchise agreement is the grant clause, which includes three types of License Agreement.

One is exclusive License Agreement, where certain intellectual property rights are given to a franchisee to use in a certain area.

Another one is the sole franchise, in which case the franchisee will have the sole right to operate the business, but it will not exclude the franchisor to open other outlets to compete with him.

The other type is an ordinary license, which allows franchisees to use intellectual property, but gives them no exclusive or sole rights whatsoever.  This means that other franchisees will be entitled to operate in the same area as well.

3. Another important clause that you need to consider about is the payment clause.

Typically, there are two types of payment, which are franchise fee and royalty.

Franchise fee is an upfront lump sum franchisees are required pay in order to obtain the license or franchise. The amount usually includes the costs of setting up stores, costs of training, legal fees and an amount of goodwill.

Royalties are ongoing payments made by franchisees to franchisors. These can be fixed on a monthly, quarterly or annually basis. The royalty figure is also described as a management service payment, possibly to enhance the perception that the franchisee is receiving management service from the franchisor.

Other than the two primary types of fee payments mentioned above, it is common practice that the franchisee contributes a fixed percentage of turnovers on a regular basis toward the promotion and advertisement of the franchise operation. These monies are generally paid into an independent fund, managed by the franchisor.

In addition to the grant clause and the payment clause, a genuine franchise agreement also contains the following provisions:

  • Training program for franchisees or their staff, which can include training at the franchisee’s location or at the corporate headquarter. The company will also usually provide ongoing support to franchisees once they take off their businesses.
  • Assigned territory. A well-prepared franchise agreement will also include the area in which franchisees will operate their businesses, and whether or not they have exclusivity rights.
  • Length of the franchise agreement. This provision specifies the duration of the agreement.
  • Renewal and termination policies. In this section, there will be clauses addressing to the issue of renewal and termination of the franchise. In many cases, the agreement will contain an Arbitration Clause, so that in the event where legal actions arise, an arbitrator will review the case instead of taking it to court.
  • Resale rights. Sometimes, franchisors will franchisees to resell their franchises

Third, get to know franchisors’ and franchisee’s obligations, as the terms set out in a franchise agreement are usually non-negotiable. Franchisors are obliged to assist with the setting up of the premises, furnish the franchisee with the procedure manual and disclose the entire franchise system. They will also provide franchisees with ongoing support such as additional training and management guidance. It is essential to include these terms of obligations and duties in a franchise agreement for the best interests of the whole franchise system in a long term.

Compared the obligations of franchisors, franchisees’ obligations and responsibilities are usually quite extensive. These may include operating the franchise, as well as enhancing and promoting the intellectual property, goodwill and reputation of the franchise. Plus, franchisees are responsible for advertising the franchise based on the requirements and directions of franchisors from time to time.

Ideally, a franchise agreement should have an appendix in which a comprehensive operating manual is laid out, and the agreement should provide that franchisees are obliged to strictly follow the manual. This will enable franchisors to develop their businesses without constantly updating Franchise Agreements.

Connect with a Surrey BC corporate lawyer at Patrola Law who is experienced in drafting precise franchise agreements.