The Franchise Agreement
Meet the Agreement
The Franchise Agreement is a standard part of franchising. It is the essential contract signed by the franchisee and the franchisor that formalizes and specifies the terms of the business arrangement, as well as many issues discussed in less detail in the UFOC. Unlike the UFOC, the Franchise Agreement is a fluid document. It is crafted to meet the specific needs of the franchise, with each having its own set of standards and requirements. But much like a lease, there are elements commonly found in every agreement.
Most Franchise Agreements should discuss the following issues:
- The monetary costs involved in the bestowal of the franchise
- Operational procedures and practices, and how these preserve and protect the franchise system
- Territorial concerns
- The services and aspects earned from payment of the franchise fee
- The exact nature of the training and assistance provided to the franchisee
- The nature of the franchise marketing program
- Recurring fees and recurring fee structures
- Bookkeeping requirements
It is essential to carefully review the Franchise Agreement. It is the final document between you and franchise ownership, and it is therefore the most important. To be safe, have a franchise lawyer look it over and review whether or not it represents a fair proposition.
The Nature of Contracts
Franchise Agreements are inherently one-sided. Part of the success of a franchise depends upon the franchise’s ability to maintain consistent products, services, and image. Without rigid control over these aspects of the business, it would be impossible to ensure a standard of quality. Any deviation from one member of the franchise can affect the entire brand.
Wish List of Contractual Needs
The following is a list of items, with brief explanations, that are particularly useful and sometimes necessary parts of any Franchise Agreement. A lack of any of the following should prompt caution.
1. A Good Definition of What You Will Be Selling
Getting a clear definition of what you will be selling is essential to avoiding numerous problems. It is important to understand the extent of your business operations so that you can avoid unfair requests and changes in your business practices. If there is no provision that specifically states that you cannot sell other complimentary products of your own choosing, it may be possible to add items to the typical selection. Make sure to clear up the possibility of complimentary products or services with your franchisor. You should also make sure that you are comfortable with the products or services you offer. Clear boundaries are necessary for any business to function smoothly.
2. Protection from Same-Brand Competition
Building your business is a long, hard, expensive task. You deserve to reap the rewards of your effort. Therefore, it is reasonable to request that you will be protected from identical franchises opening for business in a short enough distance to detract from your sales. At the least, it is prudent to ensure that your trade area remains under your control as long as you are performing well.
3. Warnings for Ill-Performance
Suppose the following scenario. You work hard. Your business isn’t flourishing, but it isn’t failing either. Then you receive a letter in the mail informing you that you are being stripped of your franchise rights. Corporate headquarters is taking over your store. What has happened is that you weren’t given a warning. It’s only fair to ask that you be given prior notice of any shortcomings so that you have an opportunity to correct them before your franchisor considers you in breach of your duties.
4. An Early Out
Occasionally, mistakes are made in the business world. Franchisees and franchisors sign on to a partnership together if it seems that it will work well. But inevitably, some of these relationships fail. Problems sometimes occur between franchisors and franchisees including unhelpful, unclear direction to personality conflicts. Some franchisees are shocked to learn that their franchisors expect royalty payments even when business is slow or nonexistent. Changes in your personal life may also complicate your arrangements early in your franchise career. For all these reasons, it is useful to have a probationary period in the Franchise Agreement to allow both parties to terminate the relationship before too much time and effort is wasted.
5. Clear Obligations
Both you and your franchisor will have duties to perform that are necessary to make the business work. Without clear definitions of what you are responsible for, you may fall behind on your tasks without fair warning. Likewise, you should make sure that the obligations of the franchisor are specific so that you can ensure their completion. If you must pay fees to receive any benefits from the franchisor, you ought to be assured that you will get fair value for your money. If your obligations are subject to change, you should be informed, and you should make sure that they are subject to a "reasonableness" clause.
6. Fair Dispute Resolution Procedures
No one wants to consider the consequences of a dispute, especially when you have just signed on to an exciting new business opportunity. But the reality is that you need to be prepared in case dispute resolution does become necessary. And it will be more of a nightmare if the Franchise Agreement doesn’t have certain provisions. The Franchise Agreement should call for speedy and even-handed dispute resolution. If arbitration is called for in the contract, see if the venue is acceptable. If you must pay the arbitration fees, check to see if the fees are refunded pending a victorious hearing.
7. Right to Sell or Transfer Business Rights
The franchisor will want some control over anyone that you wish to take over your business interest. Since one locale can affect the reputation of the whole franchise, they will exercise some control. However, they should exercise control that is measured and appropriate. As always, consult a franchise lawyer to ensure that the provisions in the Franchise Agreement are fair.
8. Written Commitment to Fairness
Since Roman times, the clause “Good Faith and Fair Dealing” has existed to connote a promise of good will between parties in a contractual arrangement. It behooves the wise franchisee to look for such a clause in the formal Franchise Agreement. Having a written commitment to fairness in any contract is a great way to get a further guarantee that you won’t be taken advantage of.
It is important to note that the above list is a wish list. No franchisee gets a dream contract either initially or through negotiation. The fact of the situation is that the franchisor is in control. It’s their business concept, system, brand, trademarks, and image. However, it is still vital to read the Franchise Agreement and look for the above passages. If the contract is missing too many necessary points, and they refuse to budge on the negotiating table, care should be taken when signing. Always take care to read and analyze all documents thoroughly before making a decision. And use a lawyer that specializes in franchising to help give you the edge in understanding necessary to make an informed decision.