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Need help with a Franchise Agreement?
Do you have a successful B2C company that serves cross-markets well?
Then franchising may be the next logical step towards growth. However, the level of trust you place in a franchisee is high, which means you need a rock-solid legal contract to match.
Meet the franchise agreement.
A franchise agreement will protect your company’s legal rights. Poorly written contracts don’t serve their intended purposes.
Instead of leaving your franchising agreement exposed to liability, read the article below that covers everything you should know.
What is a Franchise Agreement?
Franchise agreements are legal documents between a franchisor and a franchisee. They generally include franchise disclosure documents (FDDs) governed by the Federal Trade Commissions’ FTC Franchise Rule. A franchise agreement incorporates the rights and obligations of the franchisor and franchisee to license and sell a company’s intellectual property and licensing rights.
Examples of businesses that use franchise agreements include:
- Convenience stores
- Fast food and chain restaurants
- Financial advisors
- Health care providers
- Health clubs
- Real estate companies
- Travel agencies
If you plan to license your business for use as a franchise, you must have a franchise agreement to operate legally and successfully. Otherwise, your franchise agreements can result in pitfalls that come back to haunt you later. Ensure that you have a suitable franchise agreement for your situation and that you understand how they work.
How Franchise Agreements Work
A franchisee basically purchases the right to operate a company under the franchisor’s established system, playbook and brand. Franchises have a proven business model, and investors want to capitalize on their returns, especially those with previous experience. The franchisor and franchisee must collectively agree on expectations and guidelines.
Here’s how a typical negotiation of a franchise agreement works:
- Step 1 . Meet with the potential franchisor
- Step 2 . Establish the proposed territory rights for the franchisee’s location
- Step 3 . Set the minimum standards for performance and associated penalties for missed goals
- Step 4 . Determine how much you are willing to accept in exchange for your product’s or service’s use
- Step 5 . Create the advertising standards and intellectual property rights by which the transaction is governed
- Step 6 . Speak with franchising lawyers to help you translate your notes and conversations into a cohesive document
- Step 7 . Revisit with the franchisor to review the terms and conditions
- Step 8 . Schedule a franchise agreement signing for both parties
- Step 9 . Make copies for the franchisor and franchisee and distribute them
- Step 10 . Store your franchise agreement in a safe place and preferably with your other documents
Getting a franchise agreement together is a fairly straightforward process. However, there are legal and financial issues that you must consider carefully. The idea behind a franchise is to help you make a tremendous amount of money and gain brand recognition. Ensure that your documents reflect the level at which you operate.
Types of Franchise Agreements
At their core, a franchise agreement establishes how the franchisor and franchisee will operate together. It also outlines what duties and responsibilities must be upheld by both sides. However, specific franchise agreement types may work better for one situation over another.
There are seven types of franchise agreements, including:
- Master franchise agreements
- Product distribution franchise agreements
- Job franchise agreements
- Conversion franchise agreements
- Investment franchise agreements
- Business format franchise agreements
- Area development agreements
For many situations, a master franchise agreement is sufficient. However, your needs may be different according to your industry, market, and geographic location.
Key Elements of a Franchise Agreement
Franchise agreements primarily contain the same elements regardless of the type you use. There may be critical differences, however, if you need a highly specialized agreement. As such, you should always seek a customized option when drafting your contracts.
The key elements of a franchise agreement generally include:
- Territory rights
- Minimum performance standards
- Franchisors services requirements
- Franchisee payments
- Trademark use
- Advertising standards
- Exclusivity clause
- Insurance requirements
Carefully consider the elements as referenced above. They will set the tone and foundation for the relationship you share with your franchisors. Ensure that your franchise agreements contain the necessary provisions and elements for accuracy and completeness.
Parties Involved in Franchise Agreement
The parties involved in a franchise agreement are the franchisor and franchisee. While there may be third parties involved, such as franchising lawyers and insurance companies, the center of a franchise agreement applies the primary principles described below.
Franchisors are the entities or individuals who license and sell their franchise rights to a franchisee. They sell the licensing, branding, and intellectual property rights to them. The business that is selling their rights is called the franchise and can exist as a brick-and-mortar business or an online company, or both.
Here is an article that goes further into a Franchisor.
Franchisees are the entities or individuals who purchase franchise rights from a franchisor. They are typically entrepreneurial small business owners that have experience in the industry. If you are a franchisor, you should select franchisees capable of upholding the standards and procedures you created.
Here is an article on what franchisors look for in a franchisee.
Sample Clauses from Franchise Agreement
Grant of Franchise
1.1. Grant . We have the exclusive right to operate and to license others to operate a tax return preparation business using our Operating System. Subject to the terms and conditions of this Agreement, we grant to you, subject to Sections 3.2 and 3.7-3.9 below, a license to use the Marks and our proprietary business methods and software to operate an income tax return preparation business identified by the Jackson Hewitt Marks solely at approved locations in the Territory described on Schedule A. Neither we nor an affiliate will operate or license others to operate in the Territory an income tax return preparation business using the Marks and the Jackson Hewitt Tax Service® proprietary software and business methods, subject to Sections 3.2 and 3.7-3.9 below.
1.2. Number of Locations . You must open at least one office, either a Kiosk or a Standard Office, and such Processing Center(s) as specified in the Manual, in the Territory by the start of the first Tax Season after the Effective Date of this Agreement. By the start of the second Tax Season thereafter, one of your offices must be a Standard Office. For each subsequent Tax Season you must maintain a Standard Office. Once you open a Kiosk, you may not discontinue operating the Kiosk for any Tax Season without our consent, which will not be unreasonably withheld or delayed if the closure criteria in the Manual are met, unless you are unable to rent space in the National Account or Affinity Location where the Kiosk previously operated.
Initial Performance. You must prepare 500 or more federal income tax returns in the Territory in your second Tax Season. If you do not prepare at least 500 federal income tax returns in your second Tax Season, you must (i) submit to us a business improvement plan by June 1 following your second Tax Season that we approve, which approval will not be unreasonably withheld or delayed, (ii) implement the business improvement plan, and (iii) prepare 600 or more federal income tax returns in the Territory in your third Tax Season. We may require you to open a second Standard Office or Kiosk as part of the business improvement plan. If you do not satisfy all of these conditions, we may, in our discretion, terminate this Agreement for cause by written notice to you given after May 1 following your third Tax Season.
Continuing Performance . You must prepare 1,000 or more federal income tax returns in the Territory in your fifth Tax Season and each Tax Season after that. If you prepare more than 600 federal income tax returns and fewer than 1,000 federal income tax returns in the fifth or any subsequent Tax Season, you must (i) submit to us a business improvement plan by June 1 following such Tax Season that we approve, which approval will not be unreasonably withheld or delayed, (ii) implement the business improvement plan, and (iii) prepare 1,000 or more federal income tax returns in the Territory in your next Tax Season. If you do not satisfy all of these conditions, we may, in our discretion, terminate this Agreement for cause by written notice to you given between May 1 and September 1 following that Tax Season.
Minimum Performance . If you prepare fewer than 600 federal income tax returns in the Territory in any Tax Season beginning with your fifth Tax Season, we may, in our discretion, terminate this Agreement for cause by written notice to you given between May 1 and September 1 following that Tax Season.
For Small Market Territories, all tax return preparation numerical requirements set forth in paragraph 2.3 are reduced by 35%.
Your Territory . The area within which you may operate the Franchised Business is described on Schedule A to this Agreement. You may not operate the Franchised Business at any location outside the Territory. You expressly acknowledge and agree that we can operate or grant a license to others to operate a franchised business at any location outside the Territory.
Competition . We will not operate the Franchised Business in your Territory except as provided in this paragraph and in paragraphs 3.7-3.9 herein. We may commercialize and distribute or license or sublicense others to commercialize and distribute our proprietary software in the Territory through other channels of distribution using the name “Jackson Hewitt” and the Marks or using other trade names and Marks to identify the software.
Business Outside the Territory . You may not locate your Franchised Business office or Processing Center at any location outside the Territory. You may perform the authorized services in your Territory for customers who reside outside the Territory, but you may not travel outside your Territory to perform tax preparation or other services authorized by this Agreement.
Royalties . During the term of this Agreement, you must pay us royalty fees equal to fifteen percent (15%) of your Gross Volume of Business.
Royalty Payment Schedule . The royalty fees are due and payable according to the following schedule or on such other schedule specified in the Manual:
(a) Semi-Monthly Payments. From January 1 through April 15, you must pay royalties on the 5th and the 20th of the month for the Gross Volume of Business generated during the preceding half month. For the period from April 16 through April 30, you must pay royalties on the following May 5th.
(b) Monthly Payments. From May 1 through December 31, your royalty payment is due on the 5th of each month for the Gross Volume of Business generated during the prior month.
Security Exchange Commission - Edgar Database, EX-10.8 5 dex108.htm FORM OF FRANCHISE AGREEMENT , Viewed May 14, 2021, < https://www.sec.gov/Archives/edgar/data/1283552/000119312504065633/dex108.htm >.
Image via Pexels by Norma Mortenson
Getting Help With a Franchise Agreement
You do not have to feel overwhelmed by the prospect of drafting your franchise agreements. Getting help with a franchise agreement and understanding small business law is as straightforward as speak with an intellectual property lawyer . It is usually much more affordable hire a legal professional to hire a legal professional than you think.
Here are a few persuasive reasons as to why you will want to get legal help with a franchise agreement:
Reason 1. Affordability
Franchising lawyers generally work on a flat fee or quoted hourly rate. This strategy ensures that franchisors can predict their legal fees rather than pay a hefty retainer. Hiring an attorney is always well worth the investment due to the level of protection that they provide.
Here is ContractsCounsel’s attorney fees data page.
Reason 2. A Worthy Investment
If you are serious about franchising your company, you need to have a legal agreement that reflects these values. Experienced businesspeople can spot an incomplete or inadequate contract a mile away. Maximize your opportunities to attract aligned individuals by making the investment in a professional and polished franchise agreement.
Reason 3. Form Key Relationships
Have you ever noticed that people only call an attorney after a problem arises? At this point, it is already too late to do anything about the issue or dispute. By hiring an attorney to draft your franchise agreements, you establish a relationship with a legal professional that understands your business and upon whom you can call at any time a question arises.
Reason 4. Protecting Your Rights
Your franchise lawyer can also review new and existing contracts as you draft and receive them. Document management and legal reviews can become time-consuming activities for busy company managers. You can delegate these responsibilities to your legal team.
Reason 5. Negotiation Assistance
Negotiation is not an activity that franchisees and franchisors approach regularly. While there is some familiarity with the process required, having an experienced professional on your side can elevate your results. Consider bringing in an intellectual property or franchising lawyer into your negotiation discussions.
Meet some of our Franchise Agreement Lawyers
Brad is a business attorney with experience helping startup and growing companies in a variety of industries. He has served as general counsel for innovative companies and has developed a broad knowledge base that allows for a complete understanding of business needs.
I am an attorney located in Denver, Colorado with 13 years of experience working with individuals and businesses of all sizes. My primary areas of practice are general corporate/business law, real estate, commercial transactions and agreements, and M&A. I strive to provide exceptional representation at a reasonable price.
Chris Sawan is a JD/CPA who practices in the area of business law, contracts and franchising in the State of Ohio.
As an experienced contracts professional, I offer an affordable method to have your contracts reviewed! With my review of your contract, you can understand and reduce risks, negotiate better terms, and be your own advocate. I am an Attorney, Board Member, and Freelance Writer with a Bachelor of Arts degree, magna cum laude, in Film, Television and Theatre (“FTT”) from The University of Notre Dame. I was awarded The Catherine Hicks Award for outstanding work in FTT as voted on by the faculty. I graduated, cum laude, from Quinnipiac University School of Law, where I earned several awards for academics and for my work in the Mock Trial and Moot Court Honor Societies. Additionally, in my career, I have had much success as an in-house Corporate Attorney with a broad range of generalist experience and experience in handling a wide variety of legal matters of moderate to high exposure and complexity. My main focus in my legal career has been contract drafting, review, and negotiation. I also have a background in real estate, hospitality, sales, and sports and entertainment, among other things.
Elizabeth is an experienced attorney with a demonstrated history of handling transactional legal matters for a wide range of small businesses and entrepreneurs, with a distinct understanding of dental and medical practices. Elizabeth also earned a BBA in Accounting, giving her unique perspective about the financial considerations her clients encounter regularly while navigating the legal and business environments. Elizabeth is highly responsive, personable and has great attention to detail. She is also fluent in Spanish.
Abby is an attorney and public policy specialist who has fused together her experience as an advocate, education in economics and public health, and passion for working with animals to create healthier communities for people and animals alike. At Opening Doors PLLC, she helps housing providers ensure the integrity of animal accommodation requests, comply with fair housing requirements, and implement safer pet policies. Abby also assists residents with their pet-related housing problems and works with community stakeholders to increase housing stability in underserved communities. She is a nationally-recognized expert in animal accommodation laws and her work has been featured in The Washington Post, USA Today, Bloomberg, and Cosmopolitan magazine.
First in-house counsel for small TX-based company operating in the Middle East. Experienced with drafting, revising, and editing a variety of domestic and international contracts.