Definition of Franchise Agreement
A franchise agreement is a business arrangement where the owner or distributor of a business, known as the franchisor, provides a proven business model and support to another party called the franchisee. In exchange, the franchisee pays a fee for the right to operate a franchise and agrees to follow conditions outlined by the franchisor. The franchise agreement is a legal document that lists the duties and obligations of each party.
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Function
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The franchise agreement serves to protect the rights of both the franchisor and franchisee and outlines each party's legal obligations. In the agreement, the franchisor will list the requirements of the franchisee that are involved with operating the franchise. It also spells out what type of support, such as marketing and financial aid, that the franchisor will provide the franchisee.
Time Frame
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By law, the franchisor must supply a copy of the franchise agreement to the franchisee at least five days before the scheduled signing date. During this period, the franchisee has the right to request changes in language or seek terms that are more favorable. Possible sticking points could include the amount of royalties, amount of fees paid by the franchisee or terms of the franchise renewal agreement.
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Features
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Features included in most franchise agreements include provisions that outline the franchisee's territorial rights and what support the franchisor will provide the franchisee in areas of marketing and training, as well as the franchise fees, renewal rights and duration of the franchise agreement. If the franchisee is required to follow an established operating procedure, this will also be included..
Considerations
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Since franchise agreements can vary greatly depending on the business and industry, no one franchise agreement can fit all businesses. For example, each franchise has its own unique requirements for operating procedures, training of employees and the use of trademarks and patents, so each franchise must have its own agreement format.
Warning
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According to the website FreeAdvice, as franchise agreements are created by the franchisor, their terms typically favor the franchisor, sometimes to the detriment of the franchisee. Careful inspection of the document during the five-day examination period is necessary to ensure that the franchisor is treating the franchisee equitably. The franchisee should have the agreement reviewed by an attorney who is familiar with franchise and business law.
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References
- Photo Credit contract 20309 image by pablo from Fotolia.com
