Contracts define business relationships and spell out the benefits and responsibilities of each party in the agreement. In a franchise relationship, this contract is known as a franchise agreement, and it is one of the most basic legal requirements to start a franchise. This guide will help you learn more about the franchise agreement and how to start a franchise of your own.
What Is a Franchise Agreement?
A franchise agreement is a legal contract that defines the relationship between the franchisee (the one running the franchise location) and the franchisor (the franchising company). A franchise agreement will explain two topics:
- What are the responsibilities of the franchisee?
- What support or benefits does the franchisor provide?
Franchise agreements vary by company and industry but the document will explain the terms of the agreement and any fees involved. The franchise agreement will also explain the legal requirements to start a franchise and include information regarding subjects like company trademarks, termination, and renewal.
What Does a Franchise Agreement Include?
A franchise agreement will include a lot of information. If you’re not sure how to start a franchise after reading the document, you might ask a lawyer to explain any parts that seem unclear. Generally, however, the franchise agreement will explain such requirements as:
Costs and Fees
As a franchisee, you’ll be expected to invest in the company. These fees commonly include:
- An upfront franchising fee
- Monthly royalty payments
- Costs of marketing/promotional materials
- Costs for equipment, supplies, etc.
These fees allow you to operate under the franchise name and sell their products or services.
Duration and Renewal
The franchise agreement will also explain how long the contract is good for. Since you are investing money into this opportunity, you’ll want to find a franchisor that offers a long-term contract of ten years or more.
The franchise agreement will also include clauses that permit franchisees to renew their contract, which potentially allows franchisees to operate the business in perpetuity so long as other terms and conditions are met.
Benchmarks and Timeline
In some cases, the franchisor may set a timeline or a set of goals that the franchisee is expected to meet. This is important, as failing to meet these benchmarks can be considered to be a violation of the agreement and might even result in termination or negate any renewal options you might have had.
Prior to signing the agreement, you’ll need to ensure that you have the support you need to meet these goals to satisfy your obligations.
Trademarks and Intellectual Property
Understandably, the franchisor has a right to protect their intellectual property, which includes their name, logo, slogans, designs, and other branded content. But the franchise agreement grants the franchisee the legal right to use this content as part of their franchised business.
Typically, this agreement also extends to proprietary business systems, such as the operating manual or company software. While this section of the agreement is fairly standard, it ensures that you have full rights to use the company’s trademarked content as part of your franchise.
Support and Training
Not everyone knows how to start a franchise, which is why it helps to have a company that offers support and training. If you’re new to the industry, pay close attention to this section, as it clarifies what level of training the company can provide for you to get started.
Additionally, the company may provide other forms of support, especially during the startup process. They might help with such needs as:
- Securing equipment
- Establishing a hiring process
- Obtaining business funding
- Setting up your point of sale (POS) system
This support will make it easier to get started and gives you a greater chance of success.
Operating Territory and Non-Compete Agreements
Among the legal requirements to start a franchise is the operating territory. This specifies the geographic region in which your franchise location will operate.
Since each franchise owner is essentially in business for themselves, overlapping territories can create friction, even if two franchisees are working for the same company. The franchise agreement is designed to prevent franchisees from infringing on one another’s territories and competing with one another.
How Do I Find a Franchise?
Before you put your name to a franchise agreement, it helps to compare agreements from multiple companies to determine which franchise offers the lowest costs and greatest benefits. Franchise Opportunities can make this process easier, thanks to our franchise locator tool. You can use this tool to find franchising opportunities near you and start your entrepreneurial journey today.