A well-drafted franchise agreement is an absolute necessity before entering the franchising business either as a franchisor or a franchisee. Although the terms of an ideal franchise agreement differ depending on whether you are a franchisor or a franchisee, they all contain certain core provisions. Nevertheless, an attorney should be consulted before any franchise agreement is finalized.
Instructions
1. Identify the parties to the contract and state the general purpose of the agreement. The entity granting franchise rights is normally referred to as the "franchisor," while the entity or individual receiving franchise rights is referred to as the "franchisee." Include each party's legal name, address, telephone number and email address.
2. Clearly describe the franchisee's territory and whether the rights granted are exclusive or non-exclusive. In general, franchisors prefer small territories with non-exclusive rights, while franchisors prefer large territories with exclusive rights.
3. Specify the intellectual property rights that the franchisor is licensing to the franchisee. These normally include trademark and patent rights as well as signage. Trademarks and patents should be generally described and identified by their legal registration numbers. You might also want to include a drawing or diagram of the relevant trademarks.
4. Specify in detail the operating standards and business methods that the franchisee is expected to adhere to. In some franchise agreements, this section runs for several dozen pages.
5. List in detail the initial training and ongoing training and support that the franchisor will provide to the managers and employers of the franchisee. The franchisor should also list any of its publications that it will provide the franchisee. Training and support should continue throughout the term of the franchisee agreement.
6. List the initial franchise fee that the franchisee is expected to pay, as well as the total anticipated investment by the franchisee (e.g., signage and redecoration). This section should also establish monthly ongoing royalties based on a percentage of the franchisee's sales volume.
7. Detail the franchisor's obligation to advertise the franchise within the assigned territory, as well as the franchisee's contribution towards advertising costs. This is likely to be a subject of spirited negotiation between the parties.
8. State the duration of the franchise agreement. Most franchise agreements run for several years. Also state how the agreement can be renewed, and under what conditions each party is entitled to cancel or refuse to renew the agreement. Badly drafted renewal and cancellation clauses are common causes of litigation.
9. Detail any resale rights granted to the franchisee by the franchisor. Some agreements require the franchisor's consent before a franchise is sold to a third-party franchisee, while others allow the franchisee broad authority to resell the franchise.
