April 25, 2024

GWS5000

Make Every Business

Franchise Agreement Key Provisions

When it comes to the Franchise Agreement – the legal document that technically governs franchisor/franchisee relations – there is no standard format. Terms and conditions of operations vary from franchise to franchise and from industry to industry. Generally, however, Franchise Agreements cover:

1) Franchise Fee and Total (Anticipated) Investment: In order to gain the right to use a franchisor’s trademark and operating system, franchisees are required to pay an initial franchise fee.

2) Training and/or Ongoing Support Provided by the Franchisor: Every franchisor provides its own unique training program for franchisees and franchisee staff. These programs can include training done at corporate headquarters, a franchisee’s location, or both. Franchisors frequently offer ongoing support that includes technical and administrative support.

3) Territory Assignments: The Franchise Agreement designates the territory in which you as a franchisee can operate and whether or not you have exclusively rights.

4) Franchise Agreement Duration: The length of the Franchise Agreement is stated in the Agreement.

5) Advertising: In the Franchise Agreement, the franchisor will reveal its advertising commitment and the fees franchisees are required to pay towards those costs.

6) Trademark, Patent and Signage Use: How a franchisee can use the franchisor’s trademark, patent and signage is covered in this provision.

7) Royalties and Other Fees: The vast majority of franchisors require their franchisees to pay an ongoing monthly royalty of around 4-8 percent of total sales.

8) Operating Protocol: This provision explains how franchisees run their outlets.

9) Resale Rights: While some franchisors allow franchisees to sell their franchisees regardless of their reasons, many write buy back or right of first refusal clauses into their Franchise Agreements, allowing the franchisor to either buy back the franchise at a predetermined rate or match any potential buyer’s offer.

10) Renewal Rights and Franchisee Termination/Cancellation Policies: How the franchise can be renewed or terminated is dealt with in these provisions. Occasionally franchisors have an Arbitration Clause in their Franchise Agreements, meaning that, in the case that legal action on either side is warranted, an arbitrator will review the case instead of going to court.