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Franchise Agreements: An Explainer
June 21, 2022
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Franchise Agreements are the core operating principles that define the relationship between the franchisor and the franchisee.

It’s a legally binding document that spells out—in great detail— the integrated touch points of running the business from the franchisor and franchisee point of view. If you think of a franchisor (the brand) as a License and the franchisee (individual owner) as the Licensee, this contract establishes each one’s rights and obligations.

The purpose of utilizing a Franchise Agreement is a simple proposition to comprehend. This legal document is designed to balance the needs of the franchisor in protecting its intellectual property--while at the same time, ensuring consistency in how each of its franchisees operates as collective representatives of the brand.

From our point of view, it is highly advisable to provide yourself with legal representation when reviewing a Franchise Agreement. Due diligence is the responsibility of the licensee in this case, and it is extremely important for potential franchisees to understand every aspect of the mutually beneficial relationship spelled out in the document.

Franchise Agreements are known for their length and level of detail, but all typically include the following sections:

The contract will define the two parties entering the agreement, who owns the intellectual property, and the obligations of the franchisee to operate according to the brand’s expectations

The length of the relationship, which can vary based on the brand, its territory and expansion goals

Initial franchise fee and associated costs
Franchisees will pay a set initial franchise fee, most likely royalties and possibly other associated costs—all of which must be listed

Where the licensee is authorized to operate the franchise, whether or not it is protected (no competition) and the precise boundaries

Site selection and development
Franchisees are typically responsible for site selection, pending approval and assistance from the franchisor

Training and support
Franchisors will detail what they provide the franchisee in terms of training prior to opening the business and the level of ongoing support

How a franchisee is permitted to utilize the brand’s intellectual property

If applicable, the commitment franchisees must make to cooperative funds for the purpose of promotion

The minimum insurance policy a franchisee must carry to operate the franchise

Bookkeeping required by the franchisor and its’ right to auditing of information

May include instructions or expectations of a franchisee's successor rights, default, termination, indemnification, dispute resolution, resale rights, transfer rights, and other assorted notification processes

As you may notice, there are several commonalities that you might find in any type of legally binding contract. The franchise agreement should be carefully reviewed with professional legal representation. We advise that if you don’t understand a particular point, always make it a point to ask questions until you understand.

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FranNet assists individuals with the entire franchise process – from franchising an existing business to purchasing or selling a franchise. FranNet is committed to providing continuous marketing, business and operational support so that they may be looked upon as the most knowledgeable, professional and successful franchise consultants in the industry.

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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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