Are you thinking of becoming a franchisee? It can be an exciting step toward your future. When you are reviewing a franchising agreement, there are some key areas that you will want to understand and make sure are included. There are many terms and sections to a franchising agreement. It will be important to educate yourself and ask plenty of questions before you sit down in front of an actual franchising agreement with the intent to sign. Always consider consulting an attorney for the finer points. With this in mind, let’s look at ten (10) basics of a franchising agreement to start that education process.
1. What Is a Franchising Agreement?
A franchising agreement is a contract in which a franchisor (the company you will be working with) grants you, the franchisee, a license to operate under their trademarks and conduct business using their company name. This gives you the advantage of being able to open your business under an established name.
2. What Does Grant of Rights in a Franchising Agreement Mean?
The franchisor grants you the right to use their trademarks, logos, and systems to run your franchise during the term of the agreement. These do not belong to you. Instead, you have the right to use them as long as the franchising agreement is still in place. If you start a new insurance franchise, for example, you would be allowed to use their company logo, trademark, and systems. This helps to establish you by giving you a brand presence, plus the tools you need for marketing and other important functions.
3. What Does Business Relationship Mean in a Franchising Agreement?
You are not an employee of the franchisor; you will be described as an independent contractor of the franchisor. Independent contractors have greater freedom in some ways than employees, but an employee has additional safety nets under some circumstances (e.g., the ability to receive unemployment compensation under certain circumstances).
4. Why Is the Schedule Important in a Franchising Agreement?
The franchising agreement lays out the timeline for you to open your franchise, including the date by which you must be up and running. Without this commitment in writing, it would be unrealistic to move forward with a venture like a franchise. Both the franchisor and the franchisee have a financial stake and need to take steps to ensure their future profitability.
5. What Types of Training Should You Receive as a Franchisee?
The contract will explain the training and support the franchisor will provide for you (and your employees if you already have them or as you gain them). This is one of the most important areas of the franchising agreement as you should expect your franchisor to be a valuable partner in your success who will provide not only initial training but ongoing training and support. Everything from virtual training to classroom training to mentoring can be included in this. Ask detailed questions in the stage where you are learning about potential franchises, and make sure that what they have promised you is explicitly stated in the franchising agreement.
6. What Does Quality Assurance in a Franchising Agreement Mean?
The franchisor typically reserves the right to monitor your performance and the quality of the services you are providing. Look at what details or schedules may be listed with respect to this. You are becoming part of their brand to the community, so they have a right to make sure that you uphold that brand. If you owned a McDonald’s franchise, for example, you would need to prepare and serve food up to McDonald’s standards in a clean and orderly restaurant.
7. How Do You Get Business Supplies and why is This Listed in a Franchising Agreement?
Often business supplies are part of the branding of a company. This could include everything from flyers to letterhead to software that is used throughout their firm. In order to maintain “the look” of the brand and ensure the quality of services you deliver, they will expect you to use certain supplies that may need to be purchased from specific suppliers with whom they work.
8. What Are Operation Rules in a Franchising Agreement?
This one is self-explanatory, but it can become quite detailed. Every firm will have its own expectations of how to operate the business, the conduct of franchisees and their employees, etc. This is like both the operational and the human resources section of the agreement. Continuing with the McDonald’s example, you would need to keep your restaurant open during certain hours, pay your employees within certain pay ranges, have them wear certain types of uniforms, and participate in companywide promotions, among many other expectations.
9. What Fees Apply in a Franchising Agreement?
This section includes all fees for which you will be responsible as a franchisee and how they are to be paid. The upfront fees you will be responsible for, as well as royalties you will be required to pay and expenses, such as advertising, that will be your responsibility, should all be detailed. You must understand all of this and be prepared to fulfill your responsibilities.
10. Why Are the Length of Agreement and End of Agreement Detailed in a Franchising Agreement?
The franchising agreement should detail how long the agreement is to remain in place. Typically, this is from 10 to 20 years, although there is often a clause in the contract that will allow you to renew it. The end of the agreement section is equally important. It gives details regarding how and when you can terminate the franchise and what specific steps you would need to take to separate yourself from the franchise. You might be able to sell or transfer the franchise, for example, and the franchisor may well have the first right of refusal. Getting into a franchise and getting out of a franchise is a business transaction with legal responsibilities.
Is a Franchise Opportunity in Your Future?
If you are considering the freedom and success possible by becoming a franchisee, we can help with an established brand and customer base. The right franchise can be the ticket to the prosperity you deserve. It should come with hard work, but it should not come with surprises with respect to the franchise itself.