A franchise agreement is a license that establishes the rights and obligations of the franchisor and the franchisee. This agreement is designed to protect the franchisor’s intellectual property (IP) and ensure consistency in how each of its licensees operates under its brand. It defines the obligations, roles and responsibilities of the franchisor and the franchisee. It is a very important documents to that there are no disputes between the franchisee and franchisor.
The franchisee agreement protects the franchisors right to its brand, quality and systems. Franchising is about consistent, sustainable replication of a company’s brand promise and needs to detail the thousand and one business decisions that go into creating any franchise system. It’s complex and in most instances a contract of adhesion (meaning an agreement that is not readily subject to change).
What are the clauses that should be included in the franchise agreement?
- Ownership of intellectual property and basic details.
This clause should contain the details of the parties to the contract, the ownership of the intellectual property, the overall obligations of the franchisee to operate their business to brand standards, etc. Generally the ownership of brand lies with the franchisor.
- Territory and region.
Generally a franchisor gives a franchisee according to the area and the city. For example, every area has only 1 Mc Donalds. The franchisee agreement should clearly mention the area which this franchisee will operate in.
- Duration of the Franchisee Agreement.
This clause contains the duration of agreement and the renewal process if any, the term of the relationship, the franchisee’s successor rights to enter into new agreements, the requirement to upgrade the franchisee’s location, etc.
- Use of the Intellectual Property including use of Logo
This is the most important asset of the franchisor and he should mention the restrictions regarding the uses of the same.
- Deposits and profit share.
Franchisees generally pay a initial nonrefundable deposit and monthly profit share to the franchisor for entering into the system and remaining a franchisee. There are also other fees like marketing, training etc which the franchisee needs to pay.
- Site Selection and Interiors.
Franchisees generally find their own sites and develop them according to the franchisor’s standards. The role of the franchisor is generally to approve the location found by the franchisee and then approve, prior to opening, that the franchisee has built their location to meet design and other brand standards.
- Initial and Ongoing Training and Support.
In this clause it should be mentioned about the what support the Franchisor will provide to franchisee like training, field, and headquarters support, supply chain, quality control, etc.
- Advertising Fees.
The franchisor will provide full details of marketing plan and the charges the franchisee will bear.