How to Draft a Franchise Business Agreement
Franchising is a business expansion strategy that allows a business owner to grow to multiple locations without owning each location, yet still exercising control over each location. Franchise regulation is overseen nationally by the Federal Trade Commission. Some states have their own franchise regulations. All franchise relationships are governed by a franchise agreement. Before engaging in a franchise relationship, a franchiser must offer prospective franchisees 23 specific items of disclosure. These 23 items are compiled into a package called a franchise disclosure document, or FDD. An FDD typically includes a specimen copy of the franchise agreement and other contracts that franchisees must sign.
Other People Are Reading
Instructions
-
-
1
Decide on the business terms of the agreement. Every franchise agreement is governed by some specific business terms: the franchise fee, royalty rates, and advertising requirements. It is important that the franchiser create these business terms in a fashion that adequately compensates him for his work but also allows the franchisee to run the business profitably. If franchisee-level unit economics don't allow the franchisees to earn a reasonable profit, the franchise will never see large-scale growth.
-
2
Get your intellectual property in order. Franchise agreements grant the franchisee the right to use the franchiser's trade name. Franchisers should have their trade name protected by a federal trademark. You can franchise a business without a federal trademark in place, but it is ill-advised to do so. If the business involves any other intellectual property, such as patents, that legal work also needs to be completed.
-
-
3
Draft the disclosure document. The 23 items in a franchise disclosure document are standardized. All pertinent disclosures about the business are covered in the 23 items, including bankruptcy history, litigation history, work experience of the principals, the franchisee's estimated investment costs, fees associated with the franchise, and the responsibilities of both parties.
-
4
Draft the franchise licensing agreement. This is the legal document that governs the relationship between the franchisee and franchiser. It enforces in legalese the relationship that is spelled out in the FDD in plain English. Many franchise agreements also include covenants not to compete, non-disclosure agreements, and requirements for the franchisee to personally guarantee the performance of the franchise contract.
-
1
Tips & Warnings
Prospective franchisers should always work with a competent franchise attorney when drafting franchise disclosure documents and franchise agreements. It is also prudent to seek the advice of experienced franchise consultants when compiling a franchise opportunity.
References
Resources
- Photo Credit Ryan McVay/Photodisc/Getty Images
