Franchise Agreements
A franchise is a business model in which companies attempt to expand by selling individual operating units to entrepreneurs and provide them with support. In return, the entrepreneur must agree to pay the franchise owner fees and royalties as well as follow the business's operating model. The entire franchising process is outlined in a document known as the franchise agreement.
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Identification
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A franchise agreement is a legal document that spells out the rights and obligations of the franchise owner (franchiser) and the entity purchasing a franchise unit or units (franchisee). In most cases, the franchise agreement is drawn up by the franchiser, who typically uses a standard agreement for all franchisees. The franchisee reviews the document to determine its acceptability. The franchisee may ask that modifications be made as a condition of agreeing to the terms.
Elements
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A franchise agreement typically covers areas such as the fees and royalties that the franchisee must pay to the franchiser, as well as the specific support the franchiser must provide to the franchisee regarding training, marketing and operations. The agreement also outlines the franchisee's need to adhere to the franchiser's operating model. Other areas can include licensing requirements regarding the use of the franchiser's brand, geographic limitations as far as franchisee expansion and territorial rights, and grounds for termination of the agreement.
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Terms Favor Franchisor
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Potential franchisees should be aware that because the franchise agreement is drafted by the franchiser, its terms tend to favor the franchiser. In many cases, the agreement contains clauses that allow the franchiser to make changes to the agreement. A common amendment may call for changes in the franchise's operating procedures that may require franchisees to invest additional capital into their units to remain compliant. This may be necessary for the company as a whole to keep up with changing market conditions, such as the appearance of a new competitor.
Considerations
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Even though a franchiser may be willing to negotiate the terms of a franchise agreement, a willingness to do so is not always a benefit for the franchisee. An established company with a long track record of successful franchising likely knows what it takes for a franchise unit to operate successfully, so it may not agree to many modifications. On the other hand, a company that is just starting to franchise and has yet to develop an efficient process may need to be more flexible to attract potential franchisees.
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