In a previous blog, we discussed how to define, map and manage franchise territories. Now it’s time to learn a bit more about the franchise agreements themselves. When building a franchise agreement territory, ask yourself two questions. First of all, what type of territory do you want? Secondly, what exactly should be included in the franchise agreement?
What Type of Territory Do You Want?
Before creating a franchise agreement, you’ll need to consider several types of franchise arrangements, and whether the franchise agreement territory will be exclusive or non-exclusive. Will the franchise be a single unit, multiple units, an area development, sub-franchisor, fractional franchise or an international franchise? The type of franchise will have a big impact of the type of agreement. Then you’ll have to decide if the territory will be exclusive or non-exclusive.
In an exclusive territory, the franchise agreement should contain the details of the franchise area (usually a map of the area) where the franchisor cannot set up another franchise that would potentially create competition. Non-exclusive territories, on the other hand, will still define an area that the franchisees are permitted to trade in, but it also grants the franchisor certain privileges when it comes to selling additional franchises in the territory. In a non-exclusive agreement, the franchisee is trusting the franchisor to not over-saturate the market in search of a quick profit. This could lead to unwanted disputes within the franchise system.
Key Franchising Documents
The two main franchising legal documents are the franchise disclosure agreement (FDD), and the franchise agreement itself. A franchise disclosure document provides the franchisees with information about the franchisor and the franchise system. It includes information about the franchisor, the staff, and bankruptcy and litigation history. The agreement also contains territory rights, required investments, fees involved in operating and running the franchise and the responsibilities of both franchisor and franchisee. The actual franchise agreement is included in the FDD, but it is much more specific about the terms of the relationship.
What to Include in a Franchise Agreement
There are typically 8 major sections included in the Franchise Agreement:
Franchise agreement territory
Franchise terms and duration
Franchisor and franchisee obligations, standards and procedures
Advertising, training, and support
Use of trademarks, logos, and products
Restrictions on services or goods offered
Transfer, renewal or termination of the agreement
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The location of the franchise is a primary part of the agreement. This section should describe the exclusive area granted to the franchisee. The agreement should also specify the terms of the franchise, including the duration of the agreement, and whether you have the right to renew the agreement when it expires. There should be a section detailing all of the mandatory fees and what the franchisee will receive in exchange for those fees. This could include the initial fee, as well as royalty payments.
In another section, you can outline the obligations of the franchisor and franchisee. How much training will be provided? How will records be kept and submitted? What franchise financial statements will be expected from the franchisor? Will there be any restrictions on goods or services offered? Are there quality standards you’ll be relying on? There should be a section or two concerning advertising in the territory, approved sellers, business hours, pricing and trademarks or logos the franchisee is allowed to use. Finally, the agreement should end with a section describing how the agreement can be transferred, renewed or terminated. Research the legal issues well before drafting your agreement.
It’s difficult enough trying to find a good franchisee, much less to try to understand the legal process of setting up a new franchise. If you’re feeling overwhelmed with the whole process we recommend seeking legal counsel from an experienced franchise attorney. They can help you navigate the legal process, and hopefully protect you from making any costly mistakes when creating a franchise agreement territory.
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