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A Franchise Agreement, sometimes also called a business franchise agreement, is a document between two main parties, the party that has already developed their business model, called the franchisor, and the party that agrees to certain terms and conditions to create their own franchise business based on that business model.
In the franchise agreement, the franchisee sets out the franchisee's expectations and requirements for operating the business under their brand name. It can be any type of business and is often run as a franchise of restaurants or small retail shops.
In these agreements, the franchisor and franchisee outline their expectations for each behavior and agree on the boundaries of their relationship. Primarily, it is the franchisor that describes the rules that the franchisee must follow, but parts of the agreement also deal with the protection of the franchisee.
A franchise agreement helps the parties define the most important details of their relationship like the franchisor's business description, quality control standards, and, of course, fee information for the franchisee.
A good franchise agreement will cover both parties in case anything goes wrong: things like dispute resolution and governing law are also covered.
The following are some benefits of the business franchise agreement;
Most franchise agreement includes the following clauses;
The detailed relationship between both members is covered in this section. This is the first detail included in the draft franchise agreement.
This is the term of the relationship between the franchisee and the franchisor. This is the period where the franchisee is allowed to operate under the franchisor's name and logo. This period can be extended if there is a mutual agreement between the two.
This is the amount the franchisee has to pay to acquire the franchisee's trademark and business name..
This is a fixed percentage that the franchisee has to pay to the franchisor every month. The amount and mode of payment for either are subject to negotiation between the franchisee and the franchisor.
This is the location or territory in which the franchisee is allowed to operate the business. The onus is on the franchisee to find the location. This location is subject to franchisor approval.
This includes details of how the franchisor expects the franchisee to operate their business. Some areas here will include;
This section of the agreement places the franchisee in charge of marketing, advertising, and other promotional activities..
It includes the use of trademarks and intellectual property owned by the franchisor that the franchisee is permitted to use for business operations.
The franchisor is responsible for providing the necessary support and supervision to the franchisee. This is done to ensure that uniformity is maintained across all franchised businesses.
It includes the terms and conditions that mention the detailed provisions related to the termination of the franchise agreement. It deals with people where either party fails to perform as per the terms stipulated in the contract. It also mentions the penalty in case of termination of the franchise agreement.
TFollowing are the four types of the franchise agreement;.
A franchisee is contractually granted the right to open and operate a single franchise unit under a single-unit agreement. This is the most basic and often used form of contract. These franchise agreements are especially attractive to new franchisors because they provide an easy method to engage in the franchising process. If the franchise is successful over time, the franchisor may consider extending the agreement to cover more units.
A multi-unit agreement is an agreement that allows a franchisee to open and operate multiple franchise locations. A multi-unit setup is not limited to a specific geographical area. Franchises may have locations in different parts of the city. In other cases, these franchise agreements include terms that require the franchisee to follow a set of guidelines to build a certain number of units. The franchisor may have the right to engage with other interested parties if the franchisee fails to deliver within the agreed time frame.
A franchisee who is an area developer has the right to open multiple units simultaneously in a particular region. In contrast to a multi-unit agreement, the franchisor grants the franchisee exclusive rights to develop that territory in an area development agreement. For example, a franchisee may contract to open 5 units in a specific region over five years. The franchisee has exclusive rights to that territory and cannot open other units there during the contract period.
A Master Franchise Agreement has more rights than an Area Development Agreement. A master franchisee, in addition to having the right and responsibility to open and operate a certain number of units in a defined territory, also can sell sub-franchises to other persons in the territory. It is similar to being a franchisor, but only in a limited geographic area.
Following are the uses of documents of the franchise agreement;
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