Franchising could be a next-level step for a business owner or a starting point for an aspiring entrepreneur. However, parties could easily get lost in the blurry lines of the franchisor-franchisee relationship. That is why it is crucial to create an agreement that will clearly define the rights and responsibilities of each party.
What is a franchise agreement?
A franchise agreement is a legally binding contract between a franchise owner and operator. The owner owns the trademark, name or logo but the operator pays fees to start and run a business using this identity. The owner’s responsibility usually includes supplying goods or services, marketing aid, management and training, among others. On the other hand, the operator has to pay the fees and abide by the rules set by the owner.
Essential elements of a franchise agreement
Examining a contract might seem overwhelming but understanding all the terms and possible implications can save you a lot of time and worries in the long run. When scrutinizing the agreement, you may want to look out for the following:
- Rights. This section provides the rights to use the owner’s trademarks, service marks, logos and systems for the operator to run the franchise.
- Relationship. Usually, the contract describes the operator as an independent contractor and not as the owner’s employee.
- Term and renewal. The agreement should state how long it is in effect and if it is subject to renewal.
- Schedule and territory. The agreement lays out the timeline to open and start operating the franchise. Moreover, it also guidance regarding which area and boundaries the operator should run the franchise.
- Fees. This section lays down the upfront fees, royalties and advertising expenses for which the operator will be responsible.
- Termination of agreement. The agreement should state when and how you can terminate your franchise.
- Noncompete clause. The contract might include a section that will limit other businesses in which you can work during or after the term of the franchise contract.
These are just some details you should consider before signing a franchise agreement. Other clauses may discuss personal guarantee, training, supplies and quality control, operation rules, indemnification, and the applicable law and arbitration in case of disputes.