The Ultimate Guide to Understand Franchise Agreements

So you are planning to build a chain of your business in any other location i.e. opening a franchise. No doubt it is the best way to go. Your next step should be documenting the legal rights and obligations of the franchisees and for that, you need to draft a Franchise Agreement.

A franchise agreement is a legal contract that outlines the rights and obligations of the franchisee and franchisor. The absence of standard franchise agreements may pose problems to the parties entering the franchise business. In this agreement franchisor explains proprietary information, the use of certain intellectual property rights such as trademarks, and the business methods. It is the only agreement between franchisee and franchisor & varies from franchise to franchise. Though negotiations are possible it is advised to seek professional help in this regard.

Signing a franchise agreement needs some homework to do. And why not? After all, you own the chain of a brand that already exists in the market. You have to make sure that you are going the right way.

If you want to make a rewarding business decision, get detailed knowledge of things to do before signing the franchisee-franchisor agreement, and become a smart franchisee.

Make sure you are interested in the industry

Before starting a franchise business, check whether you are a good fit for the industry or not. It’s said that people work harder when they are truly interested in the task they are they’re doing.

See what others say about your potential franchisor

Contact other franchisees of the company as they can tell you about the reputation of the company, how the franchisor treats its co-workers, and other factors like how much time it took to get a return on their invested capital.

Find out how much it will cost you

Not just start-up costs will be involved but also you may be bound to pay any monthly or annual fees or ad-hoc expenses. Knowing all the outflows of cash prior to signing the agreement will make you get ready to collect the expenses and you won’t have to deal with any surprises later.

Also Read: 6 Factors To Consider While Owning A Franchise

Figure out the support the franchisor will provide

Some franchisors provide marketing support, help in recruitment of employees, set up IT equipment, and train new staff. If the franchisor is not offering any assistance, it may be difficult for you to start a franchise.

Take time, to review the agreement

Once you get familiar with the franchisor’s brand and the other factors, it’s time to sign all of the paperwork. Read carefully and check that you understand all of your obligations and what the franchisor is giving you in return. If you have a problem with something in the agreement, discuss it with your franchisor before signing.

Also Read: Is Buying Franchise a Fruitful Venture?

Check out the factors covered in the franchise agreement:

Purchase Agreements
The franchise contract should include the price and the details of what the franchisee is purchasing from the franchisor. It covers the cost of equipment, inventory, and other things in the franchise package. Though it may be considered confidential by some franchisors. Every term and condition related to payments will be mentioned in the contract.
Location
The Franchise Contract should specify the geographical area, the franchisee can expect as his sole sphere. The grant of a franchise is unshared within a particular territory many times. But, if it is non-exclusive, the franchisee would have to share their target area with other franchisees.
Signage
It is a crucial part of the franchise agreement that covers the trademark, signage, copyrights, and all the confidential information of the franchisor’s company. This provision also reserves the franchisor’s right to protect the infringement of his assets not just granting relevant rights to the franchisees to use the intellectual property.
Business Methods
Every Franchisee agreement will require details about the services franchisors have to provide to franchisees. Franchisors can obligate franchisees to use their business methods and meet their operational standards. The purpose of mentioning these requirements in the contract is to protect the reputation of the franchise if the business operates in-efficaciously or provides poor customer service, the economic value of the whole franchise would suffer.
Renewal and Cancellation of Agreement
The Agreement will provide every information about the renewal, breach, and cancellation of the contract. As the company may choose to renew the franchise license with the franchisee or maybe it can lead to termination. The agreement will contain all the required information about the termination of the operation.

Also Read: Most Favored Home-Based Franchise Businesses in India

Failure in Franchising: Termination of Franchise Agreement

The franchisee-franchisor relationship should be capable of surviving over a long period of time. However, there will be events when the agreement comes to an end. This can happen in a number of ways:

Breakup of the franchise agreement by the franchisor
Breakup of the franchise agreement by the franchisee

The interests of both, the franchisee and the franchisor on termination are similar if viewed from a different angle. They both are concerned to safeguard their financial and commercial interests.

Where the franchisor will be concerned to safeguard his commercial interests so that he can appoint a replacement franchisee. On the other side, the franchisee will be concerned to recover as much as he can financially.

Agreements that are well-drafted will mention clearly, “What will happen on the termination of a franchise agreement for a whatsoever reason”.

Termination for Breach of Franchise Agreement by Franchisee:

In order to end a Franchise Agreement, the Franchisee has to show that the Franchisor has broken a condition of the Franchise Agreement or basically breached an intermediate term; which is neither a condition nor a warranty between the both parties.

Franchisees can end the Franchise Agreement:

Within a week of entering into the agreement
By paying non-refundable money during the cooling-off period
If the franchise agreement allows them to terminate

Franchisors

The Franchising Agreement allows a franchisor to end a franchise agreement in certain circumstances:

Breach of Contract by Franchisee:
When a franchisor wishes the termination of a franchisee’s agreement to breach the agreement, the franchisor has to:

Give reasonable notice to the franchisee that it termination of the agreement is taking place because of the breach of a “particular” condition.
Tell the franchisee what he needs to do to remedy the breach.
Allow the franchisee a 30-day time period to remedy the breach.

If the breakup is remedied within the settled time frame, the franchisor cannot end the franchise agreement because of that breach.

No breakup of Agreement by the Franchisee
The franchisor must consider the grounds for default under the franchise agreement to default the franchisee whereas the franchisee will not have strong grounds to default the Franchisor and for termination. Still, the franchisee may raise defenses to attempt to excuse the non-performance of its financial obligations.
If termination is not possible, Franchisee is always open to sue for damages for breach in the usual way and he can also recover damages in the event of a termination.

Special Circumstances-
The Code specifies special circumstances under which the franchisor is able to terminate a franchise agreement without giving the franchisee any prior notice, including when the franchisee:

Becomes Bankrupt
No Longer Holds A Necessary License
Voluntarily Abandons The Franchise
Is Convicted Of A Serious Offense

Franchising goes lucratively if the agreement has been considered in a proper order. Indulge in the best franchise business opportunity and earn maximum profit. Following the procedure will help you in achieving success in your new business. Start finding flourishing franchise business opportunities at GetDistributors.com.