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Posted on May 30, 2011

Understanding the Franchise Agreement

Understanding The Franchise Agreement

Probably even more important than the Franchise Disclosure Document (FDD), the Franchise Agreement is the legal document that binds the franchisor and franchisee together. It is the document which explains what the franchisor expects from the franchisee in running the business and states the guidelines which must be followed in this relationship.

Previously the agreement was designed to ensure that all of the franchisees within an organization received the same treatment. The creation of the legal document arose once it was observed that the franchisees were prey to the franchisor’s and their legal forces and were often exploited into forsaking their profits and royalties to the corporations. However in recent years, agreements have become slightly more flexible allowing for negotiation on the part of the franchisees and it has become a binding contract on the future interaction between the two parties.The franchise agreement is a standard part of franchising and is an important part in obtaining the lease of a franchise. It is basically the formalization of all the prior meetings and decisions that came into place during the induction of the franchisee to the corporation. It specifies the terms of business arrangements, which had been mentioned in the FDD, and is a fluid document crafted to meet the specific needs of the particular franchise. The agreement is the final word for the negotiation stage and once it is signed by both parties, there is no way for there to be any changes in the arrangement (unless a new agreement is created). The agreement lays out the right and obligations of each party and their jurisdiction in decision making. The process assures that the agreement be received by the franchisee 5 working days in advance so that they may review it themselves, or get it reviewed by their legal advisors (recommended).

Due to the technical nature of the document it is best to have it legally reviewed by professional franchise lawyers to identify any hidden clauses or traps created by the franchisor to help them get the better position. It would be fool hardy to expect the franchisor to create a neutral agreement for the franchisee without their legal pressurizing.

What Can Be Found Within A Franchise Agreement?

The agreement will contain provisions covering, in considerable detail, the obligations of the franchisor and the franchisee regarding the basic operations and functioning of the business; the training and operational support that the franchisor will provide to the franchisee and at what cost it would be; the territory designated for the franchisee and any clauses for exclusivity; the initial duration of the franchise rights to be held by the franchisee and the process and requirements for renewal; how much investment would be required; the details regarding how to deal with the trademarks, patents and signs; what would be the royalties and fees to be paid by the franchisee upfront and on a regular basis; the tax issues; what would be the process should the franchise need to be sold or transferred; the advertizing policies; franchisee termination issues and which practices would annul the agreement; the settlement of disputes; the operating practices, cancellations and attorney fees.

Are all Franchise Agreements Alike?

The franchise agreement is a fluid document changing to meet the needs of the different type of business and industry. Each industry could be said to have a separate type of agreement pattern while each business within that industry may have their own separate form of a franchise agreement. Therefore, it is best to cover your bases and make sure to have legal counsel review the document before you execute.

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