The Franchise Agreement (FA) is the legal document which details the rights and obligations of the franchisor and the franchisee, including the length of term, the start and end periods of the agreement, the renewal provisions and the end of the contract.
What is included in the Franchise Agreement?
Terms of Agreement – The FA carries a contract explanation detailing the type of relationship a franchisee is entering into with the franchisor. Since a franchise relationship is temporary in nature, the FA should specify how long the agreement will last. At the end of that appointed period, the franchise is considered null and void.
Renewal – Renewal period grants the franchisor the chance to review the FA thus enabling him to decide whether to renew the agreement or not. The franchisee’s good performance is the most common of all criteria. However, a renewal does not guarantee the retention of the original terms and conditions of the agreement. If applicable, a renewal fee is also charged by the franchisor.
Investment Amount and Fees – This part of the FA explains the total investment cost and its inclusions, as well as the date a franchisor is to be paid. Included in these are:
Franchise fees – The initial franchise fee, which may be non-refundable, is paid at the start of a franchise relationship thus giving the franchisee the right to engage in the business using the franchisor’s name and business system.
Royalties – Royalties are usually a percentage of the franchisee’s sales and are typically paid weekly, biweekly or monthly.
Marketing contribution – System-wide marketing contributions are also based on the percentage of franchisee’s sales.
Training and Support – The FA should state the kind of training and support the franchisor will provide.
Purchase of Products – Products and supplies used in the franchise system should maintain consistency. Hence the FA specifies that the franchisee may only buy from suppliers accredited by the franchisor. A detailed list of approved suppliers is also provided in the Operations Manual.
Territory– The Territory determines the geographical boundaries a franchisee may operate, or within which no other unit of the franchisor’s businesses may compete.
Termination – The FA carries in it the grounds for termination of the contract. In some cases, violations of such conditions may still be remedied, however if repeated over time or failure to act on them will still lead to termination of the contract.