Understanding Franchise Agreements

Author: rob@frantechmedia.com

Date: MAY 9th, 2014

Topic: Industry Experts

Franchise agreements exist to protect your new business as a branch of the franchise and to record what is expected of you and your franchisor. Uniformity across all business within any given franchise system is also protected by the system's franchise agreement. In short, both the franchisee and the franchisor stand to benefit from an official agreement. It provides fallbacks for both parties in case of the partnership's failure.

Uniformity Provisions

Uniformity is key in a franchise system. Customers need to be able to receive the same kind of service and buy the same exact products across the board. The franchise agreement outlines the factors that will apply to your specific business. This ensures that if a customer goes to a different franchisee's business, they will receive the same French fries and onion rings, for instance, as they would at your place of business. Similarly, if a customer has a complaint about your chain in general after going to one franchise location, they can expect to receive service that is up to par with the company at your place of business.

Standard Inclusions within a Franchise Agreement

Firstly, an agreement such as this should outline your franchise fee. This should be documented in a clear, concise manner. The franchise system usually has a pre-established fee which each franchisee pays in return for use of the brand and company name.

In some cases, the franchisor is obligated to help you choose an appropriate location for your business, and the location is subject to their approval or disapproval. Both factors will be clearly outlined in the agreement. Furthermore, the use of the brand name and the company logo will be consented upon by the franchisor and documented as one of the provisions. Within that provision, you will be required to agree not to challenge the franchisor's right to the name. Along the same lines, you will be asked to relay any and all information you may have in the event that a third party tries to steal the use of the name and logo.

In addition to the provision regarding the logo and brand name, you will be asked to agree to specific requirements pertaining to the display of signage on or within your business. In most franchises, the logo and all signs are displayed in the same manner across the board, another factor which speaks to the importance of uniformity within a chain of businesses belonging to a franchise system.

Along the lines of uniformity, the agreement will feature any clauses pertaining to advertising and any ad campaigns your business may need to be a part of as an effort to boost the profitability of the franchise overall. In most cases, the franchise system has a general fund for advertising and all of the franchisees pitch into it financially. Each franchisee can then benefit from the general fund as needed, so it is theoretically a win-win deal.

The franchisor is also required to provide you any and all initial training necessary to start your business as per the company's methods. For example, if your business sells food products, the franchisor is required to get you started by providing you with thorough training in terms of preparing the food. In turn, as per yet another clause in the franchise agreement, you will be asked to keep all of the company's processes and products confidential, as well as refrain from using identical products and processes to start a similar business under a different name. You will be issued a manual by which to run your business, which, as outlined within the agreement, will belong exclusively to the franchisor.

Quality Assurance Provisions

As per the best interest of the franchise as well as your own business, you will be required to lease a building that is up-to-code and clean. You will also be required to adhere to any specific standards the franchisor may outline in terms of cleanliness and quality assurance for products and customer service, especially if you are in the business of selling food. You will need to meet all of your province's licensing and code requirements as they pertain to your line of business in order to remain eligible to be part of the franchise.

You will be required to take out insurance on your business, and the agreement will specify any particular plan or company you need to purchase from.

Along the lines of finance, you will be required to keep meticulous accounting records for your business and submit them annually to the franchisor. These records may need to be audited by a Certified Public Accountant (CPA).

Modifications and Waivers

A section of the agreement will specify that any system changes can be made solely by the franchisor, and you must adhere to them. However, you cannot make any changes within your business itself without gaining the franchisor's approval.

A non-waiver clause will specify that any provisions made by the franchisor apply to your business at all times, and that even if the franchisor does not collect its fees and shares from your business systematically, you are subject to pay them at a later date when prompted to do so. A provision specifying the amount of royalties you owe the franchise will be added as well.

Terms of the Agreement

The agreement will outline how long your contract will last with the franchise and when it will be up for renewal. It will also outline what rights both the franchisee and the franchisor have at the end of this period, as well as what actions on your part may cause the agreement to be breached. The agreement will specify that any debts incurred by your business are your own and not the franchise's, and that you - the franchisee - are agreeing that the company does not guarantee your business's success. In some cases, an arbitration clause will be added to the agreement as well, although many states and provinces no longer allow it.

There is much to understand about a franchise agreement. Every aspect of it must be reviewed with precision and understood to the best of both party's abilities. Learn more about what a franchise agreement entails by reaching out to us. Feel free to browse our site to learn more about owning a business within a franchise system.