The Advantages & Disadvantages of a Franchise Agreement
A franchise agreement is a contract that a business owner signs to gain the right to use the trademarks, copyrights, and business format of an existing organization. The franchise agreement allows the business owner access to information about the franchising company, and requires the business owner to follow certain rules when operating the business.
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Buying Land
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The franchise agreement can specify the contract terms for the buyer's purchase of real estate. The buyer may be required to purchase the land that the business is on, or the buyer may have to lease the real estate from the franchise company. This can be a disadvantage, because making a down payment for real estate in addition to other franchise fees can require the buyer to have a large amount of cash available, and if the buyer leases the property, the buyer has to make the lease payment in addition to other franchise fees.
Regional Rights
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A franchise agreement may require the franchise owner to build several stores in a geographic location. According to Louisiana State University, with an area development agreement, the franchisee gains exclusive rights to a franchise in a region, but may have to open a new store in the area each year. An area development agreement is optional, but a disadvantage is that if the franchise owner doesn't sign this agreement, the franchise owner may allow other people to open competing stores of the same franchise in the area.
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Non-Compete Clause
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A franchise agreement may include terms that prevent the franchise owner from competing with other stores in the same franchise. An independent business owner can compete with any other franchise or independent business. According to the University of Iowa, a non-compete agreement can require a franchise owner to not purchase a competing business in the area for several years, even if the franchise owner sells the store. A franchise non-compete agreement may also prohibit the franchise owner from working as an employee of a competing business for several years, since the owner gains knowledge of the trade secrets of the franchise.
Seller Decisions
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Franchise owners receive protection from decisions that the franchise seller makes. According
to California State University Chico, federal law prevents the franchise seller from shutting down a franchise if the closure decision is because the franchise seller made demands in bad faith. The franchise seller can still shut down the franchise if the franchise owner doesn't operate the business according to the contract terms or doesn't pay the franchise fees.
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