A Franchise Agreement is a legal contract between a franchisor and a franchisee. The content of a Franchise Agreement depends on the franchise, and each state has their own laws that enforce these agreements. Often times, a well-established franchise will use the same agreement for all franchisees because they have demonstrated success, while a smaller franchise will have a more tailored agreement drafted. It would be difficult to identify all the sections of a franchise agreement because they vary, but below is a list of some of the most common sections of a Franchise Agreement.
Term and Renewal: This should outline both the initial term of the initial agreement and the renewal. It should also indicate if there will be any additional fees if a renewal takes place.
Fees and Royalties: Included in this section are the fees for the purchase of the franchise and the payment terms, as well as what percentage of sales will go to the franchisor. If there are any financing arrangements they should also be included in this section. There should be a detailed list of what is included in the initial fee as well.
Operating Practices: This section is typically the largest section because it outlines all the daily, monthly, and annual responsibilities of the franchisee. Operating practices include the use of an operation’s manual, how often financial reports should be submitted to the franchisor, advertising requirements or limitations, what (if any) sales quotas that need to be met, and standard operating requirements such as hours of operation and building maintenance.
Insurance: Who is responsible for the insurance and is the franchisee personally responsible.
Territory and Site: This section should include whether there is a first refusal option and if other franchisees are able to open a business in the same area. Also included is the property itself and whether it is a leased or owned property.
Non-Compete Agreement: An agreement that the franchisee will not work for or open a competing business for a certain period of time and within a certain geographical area.
Intellectual Property: This section outlines who owns the trademarks and how the franchisee uses the trademarks with in the business.
Termination: This section outlines the rights of the Franchisor in the vent of a default, and whether the franchisor can purchase the business.
Special Regulations: This section states any state laws or regulations that must be followed by the franchisee.