The franchise agreement is the legal agreement that creates a franchise relationship between a franchisor and a franchisee. Within a franchise agreement the franchisee is granted the legal right to establish a franchised outlet and operation wherein the franchisee, among other things, obtains the license and right to utilize the franchisors trademarks, trade dress, business systems, operations manual and sources of supply in offering and selling the products and/or services designated by the franchisor. The Franchise Agreement must be legally disclosed as an exhibit to a franchisor’s Franchise Disclosure Document which must be disclosed to prospective franchisee’s prior to offering or selling any franchises.
As a franchisor your franchise agreement will serve as the primary and most important legal document that will govern and define the legal relationship with your franchisees. Within your franchise agreement you will be granting your franchisees the legal right to establish and develop their franchised locations and, in turn, the franchisees will be undertaking the obligation to establish and maintain their franchised operations in accordance with the mandates of your system and to pay to you certain on-going fees.
As a franchisee or prospective franchisee, the franchise agreement is the most critical document to your franchise investment. If you are promised something from a franchisor and you are relying on this promise, it must be contained in the franchise agreement or an amendment to the franchise agreement. To learn more about buying a franchise and due diligence steps to evaluate, click here.
Within your franchise agreement, some of the substantive legal rights and obligations that will be established include:
An issue that comes up extremely often relates to whether or not franchise agreements are negotiable. The answer is that they are negotiable provided that the negotiated changes are based on a request of the franchisee and to provide the franchisee with more favorable terms and rights but not less favorable terms or rights. While franchise agreements are typically negotiated and are frequently modified, the modifications are most commonly of a limited nature as franchisors do and must insist on uniformity within its franchise systems. Franchisors should never negotiate or modify structural items like initial franchise fees and royalty obligations.
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