Elements of a Franchise Agreement Every Prospective Master Franchisee Should Know
If you hope to be among the successful franchisors in the U.S., you need to draft a franchise agreement that will help you work towards succeeding. A franchise agreement is arguably the most important document in a franchise and it should be fair, balanced, complete, and comprehensive to help you start on the right footing.
There are different types of franchises, including master franchises among others. In a master franchise in the USA, the franchisor gives an incoming investor–master franchisee, the right to sell or sub-license franchises within a designated market or territory. In simple language, the master franchisee is a franchisor in the designated market.
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Franchise Agreement Overview
Franchise agreements are similar to licensing agreements in that, both grant the right to use a trademark and allow the license holder or franchisee to operate under the name of the grantor or issuer. However, a franchise agreement allows the franchisee to access business data, training, and business systems among others.
Elements of a Franchise Agreement
A franchise agreement is issued by a franchisor to a franchisee and it doesn’t provide much room for negotiation. However, the franchisee must ensure that the agreement includes the following elements:
Grant of Rights
The master franchisee acquires the right to use the franchisor’s trademarks, branding & logos, and systems during the franchise term. You, the master franchisee, don’t acquire full ownership of the elements; just using them.
Relationship
A master franchisee is considered an independent contractor and not the franchisor’s employee.
Franchise Term
The agreement must specify the timeline of the franchise term, such as the starting operational date and the ending date of the franchise term. Most franchise agreements are effective for 10 to 20 years or more.
Payable Fees
A franchise agreement should specify the upfront fees to be paid by the master franchisee. Besides the payable franchise fee, the agreement should highlight all the costs and expenses to be incurred by the franchisee, such as advertising and setup costs. It’s important that you are aware of all costs before committing yourself.
Franchise Territory
A franchise contract gives the franchisee the right to operate within a certain designated area, market, or jurisdiction and it specifies the boundaries of the operational area. Your agreement could be allowing sharing of the market which could later result in disputes so, be sure you understand everything about the designated market.
Terminating the Agreement
Your agreement must state how and when the termination of a franchise agreement is triggered. The agreement must also specify how to sell the franchisee’s interests, and whether the franchisor gets the first right of refusal for a franchise sale. A franchise contract should also specify the steps to be taken after the expiration of the franchise term to separate the transacting parties–franchisor and franchisee, officially.
Dispute Resolution
A franchise agreement should specify how disputes are to be resolved if they ever arise–they will certainly arise. Dispute resolution can be done through mediation, and litigation, among others.
Insurance
The agreement may state the type of insurance policies required by a prospective franchisee to operate the business.
Training
A reliable franchise agreement should specify the kind of support the franchisee will get from the franchisor; it should not only state but explain. The franchisor is typically required to train a new franchisee on how to run the business but it may not be necessary if the master franchisee is experienced. The master franchisee also has the responsibility of training their recruits or requesting the franchisor to train them if they feel incompetent.
Quality Control
The franchisor retains the right to monitor, assess, or evaluate the progress and performance of the franchisee and the quality of their services.
Rules and Regulations
The franchisor must include a guideline on how the franchise is to be operated, such as the products or services of trade, working hours, systems& software to be used, and employee wages among others.
Non-Competing Clause
A franchise agreement should include a non-competing clause to limit the franchisee’s trading affairs during and after the expiry of the active franchise term. However, non-competing clauses are unenforceable in some jurisdictions so it’s important to consult a franchise lawyer.
Breach, Default, and Indemnification
A franchise agreement must specify what constitutes breach and default of the contract and the consequences of such actions. Most franchise agreements and the franchise law require the defaulting party to indemnify the other party for losses resulting from their negligence. For example, a franchisee who terminates a contract without following due process is responsible for punitive damages. On the other hand, the franchisor should indemnify the franchisee for the loss resulting from violating the terms of the contract.
A franchise agreement is integral to the success of a franchise so you must ensure your franchise agreement has the above-mentioned features to increase your success rate.
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