Looking to start your own franchise? Build it on a solid agreement.
Franchising presents opportunities to reach new markets and new distribution channels. At the center of a franchise is a franchise agreement.
It t is a detailed agreement that defines the legal rights and responsibilities of the franchisor and the franchisee, and spells out how the franchise is to be operated. A franchisor can use a well-drafted franchise agreement to ensure the franchise functions smoothly and protect the franchise’s goodwill and brand.
What Is a Franchise?
The Federal Trade Commission regulates franchises and generally defines them as a continuing commercial relationship or agreement that meets each of the following criteria:
» The franchisee obtains the right to operate a business that is identified or associated with the franchisor’s trademark.
» The franchisor has the authority to exert significant control over the franchisee’s method of operation.
» The franchisee is required to make payments to the franchisor.
Some states require franchisees to submit certain filings and disclosures regarding the franchise.
Why Do I Need a Franchise Agreement?
A franchisor’s success is based in large part on the quality and goodwill associated with its trademark and brand. A franchisor is granting another person the right to operate a business or sell goods associated with that trademark. A well-drafted franchise agreement allows the franchisor to define how the business will be run and helps to ensure that the goods and services sold by the franchisee meet specific branding and operational standards.
What Is in a Franchise Agreement?
The franchise agreement defines the various rights and responsibilities of the franchisor and franchisee and defines how the franchise is to be operated, renewed and terminated.
The franchise agreement identifies the territory in which the franchisee will operate the business. These terms can be very specific depending on the franchise. While a franchisee prefers an exclusive territory, the franchisor may want flexibility to grant additional franchises in the same area in order to react to market demand. In addition, franchisors and franchisees may want to negotiate rights of first refusal on new franchised locations.
Next, the agreement identifies the different types of fees required from the franchisee. Franchisees are often required to pay an “initial fee” followed by ongoing fees for the continued use of the franchisor’s trademark and other support. The franchisor may require payment of additional fees for advertising and marketing expenses.
Because the franchise should anticipate changes in the market and the need to continually update its brand, additional expenses for new signage, new advertising materials and new information management systems or point-of-sale systems should also be addressed in the agreement.
Other key terms included in the franchise agreement outline the franchisor’s obligations to develop products or services to be offered to customers, to assist in hiring and training, to establish and use specific administrative procedures, such as bookkeeping and inventory control, and any obligations to provide marketing and advertising support.
How Much Work Is Needed to Prepare a Franchise Agreement?
A franchise agreement is a detailed and lengthy document. Accountants and attorneys familiar with these agreements are a valuable resource when considering a franchise. This is truly a long-term business relationship, and having a well-drafted agreement specific to the franchise can aid the franchisor in maintaining the financial success.