Without signing a Franchise Agreement, no party will ever become a franchisee. For that reason it is important to know what to look for in the Franchise Agreement. Below we will discuss some of the sections in a Franchise Agreement you are certain to encounter.
Term and Renewal Rights
When one becomes a franchisee, you have not bought a business. Rather you have been granted a right to operate a business in association with a certain brand for a specific period of time.Therefore special attention must be paid to the length of the term in the Franchise Agreement. In addition, the Franchise Agreement will mention whether there are any rights to renew the franchised business and what conditions govern whether the renewal rights may be exercised.
The right to operate a franchised business will be only permitted in a defined territory. In rare instances that territory could be the world or even a country. In other cases the territory will encompass only a certain geographic location and a radius around it. A potential franchisee should also determine whether their territory is exclusive, meaning no other franchisees or corporate-owned stores will be permitted in the territory, or whether the territory will be nonexclusive.
Obligations of the Franchisee
It is very important to carefully review the obligations of the franchisee and the consequences of failure to satisfy those obligations. Typically franchisees will be required to successful complete its training in order for the franchise to be granted. Other common obligations require the franchisee to buy products only from authorized suppliers. A franchisee will also be obligated to operate the franchised business in accordance with certain franchisor standards. It is commonplace to find obligations that require the franchisee to permit its business to be inspected at any time by the franchisor.
Advertising and Marketing
The Franchise Agreement will have a section on the contribution the franchisee makes to the franchise marketing fund. The funds are usually used to fund local and larger scale marketing campaigns which may benefit the franchisee. The Franchise Agreement will set out in detail what funds and percentages must be paid, usually monthly, to the marketing fund.
Initial Fees and Continuing Fees
The franchisee will certainly be required to a pay an initial fee, or franchise fee, and also continuing fees sometimes called royalty fees. Potential franchisees need to budget not only to pay the initial fees and the ongoing royalty fees, but also for all the other costs and expenses necessary to establish the franchise.
Accounting and Reporting
The Franchise Agreement is certain to require strict standards for the recording and reporting of franchisee’s revenue and expenses to the franchisor. The franchisor will need this information to determine the health of its own franchise systems as well as to ensure that the franchisee is remitting the proper ongoing amounts for the marketing fund and for the royalty payments. The franchisor will also have a powerful right to audit the financial reporting and accounting of the franchisee in order to ensure that the information the franchisee is providing is accurate.
This section will specify what brands the franchisee will have a right and obligation to use. Use of the franchise trademarks will be licensed to the franchisee. Except for under the Franchise Agreement, the franchisee will have no right to use the franchisor’s trademarks. The Franchise Agreement will also confirm that the franchisee will gain no rights in the trade-marks and that any goodwill or legal rights arising because of the franchisee’s use of the trade-marks will accrue to the benefit of the franchisor. The franchisee should also examine closely what happens to the trade-marks in the case that the franchisor goes bankrupt, as the franchisee will want to ensure its continuing right to use the trade-marks even if the franchisor is gone.
Transfer of the Franchise
Franchisors take a lot of time and effort before they approve a franchisee. As a result the ability of the franchisee to transfer the franchise will be severely controlled. The franchise should take a look at when and by what process it may be able to transfer its franchise should the need arise. The Franchise Agreement will also address those situations where the franchise may be transfer, for example, because of the death of a franchisee.
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Ryan K. Smith is a Lawyer and Trade-mark Agent at Feltmate Delibato Heagle LLP. He is a corporate and commercial lawyer with expertise in all manner of intellectual property matters including trade-marks, copyrights, domain names, and confidential information. You can reach Mr. Smith at (905) 287-2215 and firstname.lastname@example.org.