The central legal document in the franchise relationship is the franchise agreement. The Franchise Agreement is a legal, binding contract between the franchisor and franchisee. Franchise agreements are enforced at the State level, not Federal.
Some example components and terms of a franchise agreement include the following:
- Trademark License
A central element of a franchise is its trademarks. As the trademark owner, a franchisor is obligated to protect and police its use, and that it stands for a certain level of product or service quality. The franchisor grants the franchisee a restricted, non-transferable, and nonexclusive license to use the logos, trademarks and systems.
- Site Selection
Details the territory in which the franchisee can operate
- Training and Assistance
Details how the franchisor shall train the franchisee, how the franchisee shall operate the site, the requirements and restrictions in operating the business, and the required training of employees.
A franchisor can offer many different forms of assistance to franchisees. Some forms of possible assistance include advising on site selection; identifying suppliers for equipment and inventory; helping to design the franchise premises; supervising construction; help in developing and placing advertising and marketing; guidance on ongoing operational issues; developing new products;
- Advertising Provisions
Details the advertising and marketing obligations of both franchisor and franchisee, as well as the standards that must be satisfied.
Details the initial fees, royalty fees, and other additional costs to be paid.
- Term and Renewal
Details the start date and length of the franchise agreement. It also specifies the conditions, terms and method of renewing the franchise agreement.
- Confidential Information
States that proprietary information must be kept confidential. States that the franchisee cannot copy, duplicate, or reproduce confidential information, or make it available to other persons.
- Accounting and Reports
States that the franchisee must maintain financial books and records, and it must regularly or upon request provide the franchisor with certain forms and statements.
- Indemnification and Insurance
States that the franchisee must insure against, protect against, and indemnify the franchisor for damages suffered by the franchisor as a result of the franchisee’s actions.
- Transferability of Interests
States that the franchisee cannot transfer ownership without approval by the franchisor.
- Default and Termination
States that the agreement may be terminated if breached.
- Obligation to Comply with Laws
States that the franchisee must comply with all laws, and will obtain any and all necessary permits, certificates, and licenses for operation. The franchisee must also pay and satisfy all taxes and obligations.