Franchise Agreement – Terms And Conditions Of A Franchise Business

Starting a franchise involves putting a lot of things in place. A franchise agreement is essential because, before kickstarting operations, one should have a sound idea of all the legalities involved. Both parties must agree on specific terms and conditions involving costs, trajectories, and branding strategies. To avoid any confusion, it’s crucial that both the franchisor and franchisee decide and understand all factors involved, and this is achieved through a legal document. In this article, we’ll explain all the components of consideration and also cover all other relevant details.

Components of a franchise agreement

The main components of a franchise agreement are:

Monetary details

The costs of starting and operating a franchise under an established brand name are of multiple types. Detailing each one of them in the agreement is vital. Whether it’s franchise fees or royalty, making things clear and organized from the beginning is a step in the right direction. Apart from ‘how much to pay,’ details of ‘when to pay’ and ‘how to pay’ should also be present.

Operational and staff details

Every franchise operates differently, and hence the operational policy varies across brands. This is arguably the most critical detail, second only to the monetary one. That’s because these details advocate the day-to-day functioning of the franchises. These include all the essential know-how and list all operational parameters clearly. Some franchises have specific guidelines for day-to-day activities- from how they greet customers to how the product is sold. 

Details of trademarks 

Any intellectual property owned by a franchisor is accessible to any new franchisee, and the rights for this must be mentioned in the agreement in detail. That’s because this safeguards the rights of both the franchisor and the franchisee and regulates the use of trademarks. 

The causes for contract termination

Under certain exceptional circumstances, a franchisor may terminate the contract with the franchisee and vice-versa. For things to happen within all legal limits and smoothly, the agreement must contain the clauses relevant to termination conditions. The clauses should be meaningful for both parties involved as well as clear and error-free.

Exit clauses

A franchise agreement must contain the policies for reselling in case the franchisee decides to sell their outlet or store at a point in time. Clauses can be framed in a way that allows franchisors to buy back their franchise at market rates or any other specific mentioned rate in the contract. 

Insurance requirements

Franchisors often require franchisees to maintain particular types of insurance coverage throughout the whole duration of the contract. Certain clauses can also be used to defend or indemnify the franchisor in damage caused directly by the franchisee. 

Audit and listing details

Franchisors charge royalty fees based on gross sales or the profit generated from sales monthly or quarterly. Hence, they deserve the right to obtain accurate information regarding the franchisee’s tax returns and other relevant financial details. Hence, the maintenance of lists or records might be an important requirement in certain agreements. The franchise could request an audit of the lists or records maintained by the franchisee. 

Transfer of ownership

In the resale clause, the franchise could add a line pertaining to the transfer of ownership. If and when the franchisee decides to sell the owned franchise, a franchisor may gain the right to buy first, as mentioned before in this article. The ‘transfer of ownership’ clause could further mention all relevant details or sequences that must be followed during the re-sale process.         

Steps for framing a franchise agreement

Creating a franchise agreement can seem like an arduous task, but it’s essential for the smooth functioning of a franchise and for the satisfaction of the parties involved. Here are the stages of creating a franchise agreement:

Deciding and creating details

The first and foremost task to be done when creating an agreement is finalizing the terms and conditions, fees, renewals, and other details. You must figure out dates, costs, and other numerical settings before anything else. Initial fees/franchise fees, royalty payment percentages, renewal dates, termination or exit process, and reselling policies take second place when it comes to prioritization. 

Franchisees need to ensure that the percentages and costs mentioned in the contract are fair to them and payable. They can negotiate or discuss a more comfortable rate if it’s too much of a burden. Franchisors also need to ensure that the costs of operating the business and training newly recruited staff are justified by the percentages mentioned in the contract. 

Reviewing clauses

After the writing or drafting process is done, a lawyer verifies that all legal parameters are met and that there’s no room for confusion. It’s also advisable to seek the help of a consultant or expert in these matters. Anyone with a more profound knowledge base of how things work in the franchise world would be an excellent choice for reviewing the drafted contract. 

Sometimes, some legalities might have been skipped or ignored by the contract’s creators. Seeing an expert in this field will also ensure that those obvious mistakes aren’t made. Different franchise categories require different terms and conditions. All these factors need to be checked thoroughly before proceeding to finalization. 

These are the two stages of drafting an ideal franchise agreement that benefits both parties. 

Also read: Royalty Fee For Franchises- All You Need To Know About It

Conclusion

Agreements help detail and list all crucial parameters involved in an event or deal. Hence, paying close attention to your franchise agreement is important. The first stage is agreeing on the specifics, the second involves drafting the argument, and the third involves getting the draft reviewed by a legal expert. The final and arguably most critical stage is reading all the clauses carefully before finalizing the deal. These things constitute the making of the ideal agreement for your franchise.