Guide to Understanding Franchise Agreements
Purchasing a franchised business provides you with corporate support and an established brand-name. It can also limit your freedom in the way you run things as the owner. The franchise agreement details requirements, restrictions and other important elements of your business relationship with the franchise company. Understanding the franchise agreement will help you protect your interests.
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Structure
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Franchise agreements typically have two sections: the license section and the purchasing section. Some franchise corporations prefer to split the information into two separate contracts to avoid confusion, make it less cumbersome or divide the contract to legally secure each section by its own merits.
Purchase Section
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The purchase section of the contract details the basics of buying the business. It should include the purchase price and which services must be contractually provided. For example, if you are buying a franchise restaurant, the purchase section of the franchise agreement will state you are going to provide food services. Many agreements detail the exact location, town and zip code of the new business.
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Licensing Section
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The licensing section is generally longer and more detailed than the purchasing section of a franchise agreement. The licensing section details obligations you agree to as a franchise owner. These obligations can include: hours of operation, exact menu or products to be sold and corporate training your employees will attend. Other things that are seen in this section of a franchise agreement include language that prohibits the corporation from allowing another franchise within so many yards, feet or miles of the business you have purchased. If you have not included this in the franchise agreement, you should ask that it be added before you sign it as it will protect you from having future competition by the same corporation.
Inventory
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Equipment included in the agreement as well as inventory will also be listed in the franchise agreement. If you are contractually obligated to choose from corporate approved vendors, this will also be listed in the franchise agreement.
Advertising
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The advertising section of the franchise agreement details obligations either party has with regard to advertising. This section is typically located in the licensing section under franchise obligations. A percentage of your monthly franchise fees will typically be earmarked by the corporation for advertising purposes. The number, frequency and range of advertising to be done by the corporation should be included in the franchise agreement, along with any restrictions placed on you about the style, products and tone of local advertising you choose to purchase.
Protection
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A list of concerns and items you want to be sure are included in the franchise agreement should be compiled well before the signing. You can email or fax them to the attorney you choose to supervise the franchise purchase. These concerns should be addressed and included in the final documents before the signing meeting.
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References
- Photo Credit contract 20309 image by pablo from Fotolia.com
