You've finally done it. You've decided you want to buy a franchise and live the dream of being your own boss. You think you've found the perfect opportunity and you're ready to sign on the dotted line. The dotted line we're referring to is the franchise agreement. Maybe you aren't actually there yet, but just so you're prepared when you finally do reach that stage of the game, let us tell you a little about the franchise agreement and what it actually covers. No matter which franchise you decide to buy, you will be faced with the franchise agreement. It's an important document that should be talked about.
What is a Franchise Agreement?
As the name implies, a franchise agreement is an agreement between you and the franchise that basically states all of the details regarding the purchase of the franchise. The franchise agreement includes everything the franchisor requires from you as a franchise owner. Although you are your own boss when you purchase a franchise, you will have to adhere to certain standards and requirements. That makes sense, after all, since you will be representing the brand you're buying into. The franchise agreement will also tell you what you can expect from the franchisor. It goes both ways. This may be the most important document you deal with when you buy a franchise.
What Does the Franchise Agreement Cover Specifically?
While franchise agreements can differ slightly from one franchise to another, most franchise agreements include the same basic information. Here are some essentials:
- Grant of Franchise This is an important one. This tells you the franchisor is granting you limited, non-transferable, and non-exclusive rights to use the franchisor's trademarks, logos, service marks, the franchisor's systems, and other franchise components for a period of time that will be outlined in the franchise agreement. Keep in mind that you are licensing the trademarks, logos, etc. You are not buying ownership. The franchisor retains the right to terminate your license rights for any breach of the franchise agreement. Some franchisors reinforce this section by adding another section individually covering all proprietary materials, intellectual property, and confidential information and the rights granted for each.
- Required Fees This section will outline all of the fees that will be associated with the franchise. All of the costs are here, including fees for the purchase of the franchise, all fees that must be paid to the franchisor before you can open the franchise, all fees you will be expected to pay during the term of franchise ownership, any financial obligations you have regarding advertising expenses and equipment expenses, etc. All of your financial obligations are fully covered.
- Training The franchisor's training will be outlined here, including any training required or expected by the franchisor.
- Advertising Obligations This section is often included. It will usually cover any advertising obligations discussed in the "fees" section and should also outline any advertising obligations the franchisor undertakes on behalf of the franchise.
- Quality Control Expectations This section covers all of the franchisor's expectations for the franchisee regarding quality control, how the franchise should be operated under the franchise-wide policy, and specific language that details what is and is not allowed regarding the use of the franchise trademarks. The franchisor wants to be sure the brand's integrity is kept intact and that the level of product and service is maintained according to franchise standards.
- Default, Damage, and Complaint Limitations Every franchise agreement will include a list of specific violations of the franchise agreement that can be considered a breach of contract. These are typically violations that can result in immediate termination of the franchise agreement. Specifically, this section outlines the franchisor's specific obligations and limitations regarding any breach.
- Right of Refusal Almost every franchise agreement gives the franchisor the first right of refusal regarding whether or not to purchase the franchisee's business. This gives the franchisor the first opportunity to buy the franchisee's assets upon the expiration of the franchise agreement's termination.
- Franchise/Franchisee Relationship Franchise owners are independent contractors of the franchisor. This means the franchise owner is not an employee or an agent of the franchise. As an independent contractor, you are your own boss and in business for yourself. This section outlines your duties and responsibilities as an independent contractor and stipulates your responsibility toward the employees you hire.
- Indemnification Every franchise agreement has this one. States that the franchisee must pay the franchisor for any losses the franchise suffers because of something negligent the franchisee does.
In addition to the main points covered above, franchise agreements will likely cover the transfer of the franchise, insurance obligations, obligations of both parties upon termination of the franchise agreement, any non-compete clauses that prevent the franchisee from opening a competing business, and how complaints or disputes are resolved. There may even be a miscellaneous section covering odds and ends of information not covered in one of the franchise's major sections. There is no blueprint for the franchise agreement. Some cover the general points, others are more specific and cover every tiny detail, often in more than one section. When you're ready to buy a franchise, it's a good idea to hire a franchise attorney to at least go over the agreement with you before you sign it. Most of them are fairly straight forward and make a lot of sense, but if you have never purchased a franchise before, it's easy to get confused about what you can and can't do.
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