Franchise Agreements

The franchise agreement is the key document of the business relationship that exists between a franchisee and franchiser. It is legally binding on both parties, as it lays out the rights and obligations of each party.

In the United States, the law requires that you are entitled to receive a sample agreement five business days before your signing. This may either be attached to the disclosure statement or presented separately. It is this document which you should take to a lawyer who specializes in franchise law, who can then advise you on the pros and cons of it.

Many franchise agreements are drawn up pretty much in favor of the licensing company. Do remember that you are technically applying to be sort of the same thing as an employee of the company, but you’re being “hired” as a “mini-CEO”. This is how the law will see it. You just do not have complete freedom to do whatever you want when you’re a franchisee. The company gets final say in just about everything, and they will enforce it under their legal right to do so.

At the very least, the agreement will cover these points:

* What the obligations are of the franchisor and franchisee regarding how the business is to be operated. This includes all operating practices, and may detail from whom and how often you must buy supplies.

* Whatever training and operational support the franchiser will be providing, and at what cost. You can have things itemized down to the last penny here.

* A delineation of your territory and any exclusivity afforded to you for your domain.

* The length of time of the franchise agreement, plus renewal terms.

* How much you will be required to invest.

* The manner in which you are to deal with trademarks, patents, copyrights, logos, merchandising items, etc.

* How much in royalties and service fees you will have to pay.

* What happens in the event that you want to sell or transfer out of the franchise. Yes, there is a legal way out of your obligation, although there may be penalties for early withdrawal.

* In what way disputes are to be resolved. The first step is usually arbitration, which is like a court trial where the company owns the judge, jury, and council.

There is no “one size fits all” standard for franchise agreements, since businesses come in so many different forms. Even within a specific niche in an industry, there can be wild divergence between companies as to what they put into a franchise agreement. Some companies want to micromanage down to the last penny, and some give you lazie faire to do pretty much whatever you want as long as it makes money and doesn’t hurt the company.

The agreement is necessary for the company to prevent their corporate empire from degenerating into an anarchy. There is, after all, no point to franchising if you’re going to have everybody pulling in different directions. By maintaining a stable system throughout a franchised company, it ensures consistency. Remember, franchising has to be transparent to the customer; they should be able to walk into both the original store from which the company was founded and the 1000th franchise start-up location in another country and not tell the difference.