As a potential franchisee, you should make sure that you thoroughly grasp the terms of your franchise agreement, which is the most crucial document you will sign when starting a business. Ensuring a comprehensive agreement will help you get your new business off to a good start.
An Overview of Franchise Agreement
Franchise agreements are contracts in which a franchisor gives you, the franchisee, permission to use their trademarks and do business under their name. This permission is granted by signing a franchise agreement. You’re allowed to use an existing business name as long as you adhere to the terms of the agreement. The franchisor is Taco Bell, and you are the franchisee operating a single chain site if your goal is to build a Taco Bell.
There are several similarities between franchise agreements and license agreements. Both allow the licensee or franchisee to utilize a trademark and sell goods under the brand. An advantage of a franchise is that it provides access to a business system and business information, and training. A Taco Bell is a franchise if it is opened. If you want to put an image from Frozen on a t-shirt, you’ll need a licensing agreement from Disney.
Clauses that Must be on your Franchise Agreement
The franchise agreement, which is usually provided by the franchisor and doesn’t leave much opportunity for discussion, is usually the only document you have to work with. Make sure that the agreement includes sections and definitions for the following terms:
Grant of Rights
The franchisor permits you to use their trademarks and service marks to run your business during the agreement term. You don’t own these things, but you have the right to use them.
The franchisor clarifies that you are not an employee but an independent contractor in the franchisor-franchisee relationship.
The franchisor delivers you a timeline for you to open your franchise, including the date by which you must be operational.
The franchisor explains all the fees you have to incur and the upfront fees you have to pay to start your business. It mentions all other fees you have to bear to run the business effectively.
Most franchise agreements require you to guarantee the financial agreement personally, and your company is liable for the debts you make.
The contract gives you the right to run your business in a certain area, and it should be very clear about the boundaries of that area.
In general, the agreement should say how long it will last. Most franchise agreements have a clause that lets you extend the contract.
Your agreement will say when and how you can end your business. It will also say how to sell or transfer the franchise and if the franchisor has the first chance to buy it back if it’s sold to someone else. When the franchise agreement ends, there are usually steps that the franchisee must take to cease the business officially.
The franchisor will mention on the contract insurances that you must have to operate the franchise; the franchisor will need you to have all the essential insurance.
The franchisor will discuss the amount of training and support they will provide to you and your employees.
The contract will mention the right of the franchisor to monitor and evaluate your performance and the quality of the goods or services you are providing.
The contract will mention supplies you need to obtain to run the franchise. They will also mention if there is any specific region or vendor suitable for procuring quality raw materials or services.
The franchisor is likely to have very specific rules for running your business, such as what products you can sell, when you can open, what software you must use, how you must set up your store, and how much your employees get paid, among other things.
During or after the term of your franchise contract, you might have a non-compete clause in your agreement. This clause will keep you from working for other businesses while or after the contract is over. Depending on where you live, some of these clauses may not be valid or may not even be legal.
Violation of Terms
The contract will say what happens if the contract is not kept or if it is breached. It will also mention the penalties for breaking the contract and how much they are.
If the franchisee does something or doesn’t do something that causes the franchisor to lose money, the contract usually says that the franchisee will have to pay the franchisor back.
Applicable Law and Arbitration
The contract will mention the State Law applicable in a legal dispute via court. In most franchise agreements, the clause is to settle disputes through arbitration.
It can be exciting to start your own business. To make sure you understand and follow all of the rules, you might want to talk to a franchise lawyer for an exhaustive franchise agreement.