Franchise agreement: Overview, definition, and example
What is a franchise agreement?
A franchise agreement is a legally binding contract between a franchisor (the party granting the franchise) and a franchisee (the party purchasing the franchise). This agreement outlines the terms and conditions under which the franchisee will operate the franchised business using the franchisor’s brand, trademarks, systems, and operational model. It details the rights and responsibilities of both parties, including how the business will be run, the fees to be paid, and the duration of the franchise relationship.
Franchise agreements are crucial in establishing the legal framework for the franchise business, ensuring that both parties understand the operational standards, expectations, and obligations involved in running the franchise.
Why is a franchise agreement important?
A franchise agreement is important because it provides the foundation for the franchise relationship, ensuring that both the franchisor and franchisee are clear on their roles and expectations. It protects the interests of both parties by outlining the franchisee’s right to operate under the franchisor’s established brand and systems, while also setting out the franchisor’s obligations to provide training, support, and other resources.
For the franchisor, the agreement ensures that the franchisee maintains the brand’s standards and follows the operational guidelines to protect the reputation and success of the brand. For the franchisee, it provides a proven business model and access to a recognized brand, along with the legal rights and protections needed to operate the business. Without a well-defined franchise agreement, the franchise relationship can become contentious and lead to legal disputes.
Understanding franchise agreement through an example
Imagine a successful coffee shop chain called "BrewMaster" that wants to expand its business by selling franchises. A potential franchisee, Sarah, is interested in opening a BrewMaster location in her city. Sarah and BrewMaster enter into a franchise agreement that outlines the following terms:
- Initial franchise fee: Sarah will pay BrewMaster an upfront fee of $50,000 to use the BrewMaster brand and system.
- Royalty fees: Sarah agrees to pay BrewMaster 6% of her monthly revenue as a royalty for the ongoing use of the brand and support services.
- Training and support: BrewMaster will provide Sarah with training on how to operate the coffee shop, marketing materials, and ongoing operational support.
- Duration: The agreement will last for 10 years, with an option for Sarah to renew the agreement for another 10 years.
The franchise agreement ensures that Sarah can operate a BrewMaster location using the brand and operational system, while also ensuring that BrewMaster can maintain control over its brand and receive a share of the profits.
An example of a franchise agreement clause
Here’s how a franchise agreement clause might appear in the document:
"Franchisee agrees to operate the franchised business under the name 'BrewMaster,' using the franchisor’s trademarks, systems, and operational guidelines. Franchisee shall pay an initial franchise fee of $50,000, which is due upon the signing of this Agreement. Additionally, Franchisee shall pay the franchisor a royalty fee of 6% of monthly revenue, due on the 15th day of each month. The term of this Agreement shall be ten (10) years, with an option to renew for one additional ten (10) year period upon mutual agreement and payment of the applicable renewal fee."
Conclusion
A franchise agreement is a critical legal document that defines the relationship between the franchisor and the franchisee. It ensures that both parties understand their roles, obligations, and expectations, providing a clear framework for the operation of the franchise business. This agreement protects the interests of both the franchisor and franchisee by detailing the financial terms, operational standards, and duration of the business relationship. For anyone considering becoming a franchisee or granting franchises, understanding the franchise agreement is essential to a successful and legally compliant business venture.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.