Key Points You Must Know About Franchise AgreementsSeptember 5, 2022 By Dinesh Parmar
Starting a franchise is a lucrative option, especially if it is of a highly famed brand. The business, the profits, the clientele, and the publicity are all worth the investment. But to receive all of that, it is important for the business to continue growing & maintain a steady pace. That can happen only when the franchise can effectively deal with the legal issues that arise in due course or work for their prevention.
The first pitfall in those legal hurdles is the Franchise Agreements, loopholes in them and the business is bound to suffer. To prevent such things from happening, there are a few things that must be kept in mind while preparing them.
Worried, anxious, what are those things, well don’t be, we are here to sort those points for you and give you our top recommendations on points that must be incorporated in the Franchise Agreements. Without further ado, let’s get started.
Franchisee & Franchisor Details
Hands down the first point to look out for is the details part, both the details including the full address are important. Any discrepancy in the details part could prove very costly for the franchisee. Once a business grows and is marking profits, competitors try by hook and crook to bring them down, any mistake in basic details could prove fatal. They need to be accurate & factual.
Use of IP & Trademark
Trademark and Intellectual property are at the heart of franchise agreements, they form the base of terms under which a franchise is granted certain exclusive rights like the Use of the Franchisor's name, logo, and brand. Software systems, trademarks, symbols, etc. Any other special right is also mentioned under this heading. This forms the boundaries under which the franchise can operate.
Important to note, that most franchise agreements contain a clause which specifies the cease of use of IP in case of franchise termination.
Training, Quality Control & Support
For a franchisor, a big point is the brand name and the service quality that he is providing to his customer, he expects the same to happen in the franchisee. For that provision of training, quality control, audit & support is needed, these arrangements made by the Franchisor help Franchisee in a big way to move on the path of growth quickly and provide the same experience as other outlets. One should keep an eye on the details of these very important provisions in the agreement to avoid any hassle later.
Operational Costs & Fees
Barring the Franchise purchase amount, the other monthly expenses like Franchise fees or Royalties, Marketing and advertising costs, salaries of staff, overhead costs, etc are to be borne by the Franchise and must be listed in the agreement, such that at a later date an item doesn’t turn up whose cost bearing party is unknown. These small but useful details are important.
Duration of Agreement, Renewal & Territory
These 3 key parameters are vital for any contract, for how many years the agreement has been made, what are the conditions of renewal if permitted and what is the area of operation or territory for the franchisee. Any deviation from the set parameters is bound to invite legal notices from others including the franchisor too. A typical agreement shall be for a decade or two, can have renewal provisions and clearly outlines operational territory for the franchisee. It is better to have these looked at by a corporate law firm to avoid any misunderstanding.
Let’s be obvious, no one wants the franchise license to be terminated, this power mainly vests with the franchisor. The common causes of termination include bankruptcy, defaults in paying royalties or other costs, failing to comply with brand regulations or adverse audit reports and inaction. In such cases, all IP and related property are immediately ceased to be used by the franchisee and the matter may go to court. Some agreements though contain a provision of taking the help of an arbitrator before going to court.
As for Non-Compete, the franchise owners are restrained from opening a similar business or service within a certain mile radius to avoid conflict of interest and misappropriation. Non-compete also kicks in the form of a cool-down period of say 5 years after franchise termination, during this time too the ex-franchise cannot open a new similar venture. The technicalities here are what make the matters complex, be sure to look out for such details.
What’s the solution:
Put simply, getting the services of a corporate legal firm vastly helps in such cases. They are experts in these cases and might even suggest additional pointers to cover. Their expertise, knowledge and skill also aid in case there is going to be a legal case later. Their advice is important and must be heeded. It is worth pointing out that you can keep the law firm on a retainer too for any future troubles as they can be of immense use at that time and has many benefits.
Some Final Words:
There you have it, our top 7 pointers to look out for in franchise agreements. No matter which way you go, getting a draft prepared from in-house counsel or opting for a full-fledged corporate law firm, some effort and diligence on your part are needed too, as they say, the devil is in the details, a thorough read of the franchise agreements and seeing that it is in sync with our business goals is important. If in doubt, you can take the services of a Professional law firm like ours, with decades of experience & skills, our efficient lawyers are there to formulate a personal strategy and plan for you to achieve and scale many heights. Try our services, and feel the difference.