What is a Franchise Agreement?

A Franchise Agreement is a contract whereby a franchisee buys the right to run the business of the franchisor at a designated location/market.


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Franchise Agreement

What is a Franchise Agreement?

A Franchise Agreement is a contract whereby a franchisee buys the right to run the business of the franchisor at a designated location/market.

The Franchise Agreement delineates the respective rights and obligations of the franchisor and franchisee in the franchise arrangement.

Under a Franchise Agreement, the franchisor’s obligations would be training and providing assistance, while those of the franchisee will be focused on the operation of the business e.g., the use of intellectual property rights.

Why is a Franchise Agreement important?

A Franchise Agreement is an instrument for getting legal approval of doing business on the basis of the franchisor’s business model by using the franchisor’s brand name and goodwill. This is a very popular business model because it has already been tested and running successfully so there is a minimum risk while operating such kind of business if done correctly. It helps both franchisor and franchisee to protect their legal right. While drafting this agreement, all the things related to payment, renewal, training & management, and transfer of ownership has already been discussed and written down on the agreement which will help both parties to settle down the disputes if arise in the future.

How does a Franchise Agreement work?

A Franchise Agreement works out if there is mutual understanding between the franchisor and franchisee throughout the business. Some of the important things to include in the agreement are:

Terms and conditions of the agreement: this includes the basic terms and conditions on which both franchisor and franchisee have agreed to do the business.

Duration of the franchise agreement: the duration or time frame of the franchise has been written down on the agreement, this also includes the process or possibility of extending the duration.

Training and support: while starting a franchise business one of the main concerns for the franchisee is training and support from the franchisor. A franchisor is responsible for providing all the training and support while starting the business as it helps to develop a proper system for the business.

Use of goodwill and brand name: this includes the use of intellectual property rights, trademarks, and goodwill of the franchisee.

Fees and payment: this includes the fees and payments a franchisee has agreed to pay to the franchisor.

What are the three types of franchise agreements?

There are three types of franchise agreements:
Master Franchise Agreement: This agreement grants a master franchisee who is also known as a sub franchisor the ability to approve franchises to others dealers in a specific geographical location.
Area Development Agreement: Also called an “area director agreement” or “area franchise agreement,” this agreement grants the sub franchisor similar rights and capacity, but with comparatively less responsibility and rewards.
The representative, here usually does not hold the power to grant or sign franchise agreements, but they have the right to help with the marketing process of the franchise and provide assistance to franchisees on the franchisor’s behalf, within a certain area.
Area Representative: This is an option agreement where one agrees to open and operate a certain number of franchised businesses in a specific area. A separate fee has to be paid to obtain exclusive rights to create more units in the area.

Can a Franchisor terminate a franchise agreement?

Normally when a franchisor finds a breach of contract, they have to inform franchisees and provide them a reasonable time to sort things out. If things were not sorted out properly according to the terms and conditions mentioned in the agreement then a franchisor can terminate a franchise agreement.

Conclusion

A successful franchise business requires a well-drafted franchise agreement and effort from both franchisor and franchisee. While a franchisor is responsible for establishing business systems, providing the use of trademark, providing training and support on the other hand a franchisee should pay franchise fees and manage the franchise location.

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