A legamart lawyer guiding a client to sign a Franchise Agreement

6 Essential Elements of Franchise Agreement: Licensing vs Franchising


Franchise agreements may seem simple in terms of definition, but you should consider that the clauses are tailored to fit your business and needs. A franchise agreement should include clauses pertaining to location, duration, operation, fees, and use of intellectual property. However, basic knowledge would not suffice to conclude such an important contract, and professional legal advice is necessary.

A newly established restaurant in Canada is seeking to become as popular as McDonald’s. Besides, the owner hopes it can give its customers the same feeling they have when tasting McDonald’s fast food. But how can it make that happen legally? Is there a contract to entitle the owner to that? And if so, how should it be drafted?

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What Is a Franchise Agreement?

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A franchise agreement is a contract based on which the franchisor entitles the franchisee to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor’s trademark, so the franchisor’s business is duplicated. By entering into a franchise agreement, the franchisor can expand its company without the risk of debt or the cost of equity.

At the same time, it can make sure that each franchisee operates the franchise consistently with the franchisor’s trademark and know-how. In exchange, the franchisee makes payments to the franchisor in the amount, terms, and conditions established in the franchise agreement.

Don’t Confuse It With Licensing Agreement!

The owner of that Canadian restaurant is wondering if maybe by achieving the license to use only McDonald’s trademark, its restaurant will be as popular as McDonald’s. But it should be noted that a mere trademark won’t give the new restaurant the high quality it’s seeking.

That’s why you should avoid confusing licensing agreements with franchises. There are several differences between these two, but the key point is that licensing agreement grants the licensee only the right to use the licensor’s trademark. That’s why you can see Disney characters on everything from notebooks to sleeping bags to T-shirts and clothing.

On the other hand, by a franchise agreement, the franchisee would gain the right to learn and then operate the franchisor’s know-how and use its trademark. 

So in the above question, the suitable contract for that restaurant would be a franchise. By entering into this contract with McDonald’s, the new restaurant will be able to use McDonald’s trademark and also its secret recipe. Therefore, the customers of this restaurant in Canada can feel the same as other McDonald’s customers regardless of where they are having their meals.

6 Things You must have in your Franchise Agreement

  1. Use of Trademarks: A crucial subject of the contract is defined under this section. The specific trademarks, service marks, or logos a franchisee can use should be listed in this section. If either party intends to limit the use of the given trademark within a specific territory, the contract should specify this.
  1. Term of the Franchise: The franchisor might want to limit the duration the franchisee is allowed to use the given rights. This period must also be specified so that both parties know the duration of their rights and obligations.
  1. Franchisee’s Fees and Other Payments: Paying fees is the franchisee’s primary obligation in exchange for the rights it receives. These fees may be paid one time or periodically. Since there are various fees a franchisee may pay, it’s necessary to consult with a LegaMart lawyer before making yourself obliged to them by signing the contract.
  1. Obligations and Duties of the Franchisor: There are a few common obligations that normally all franchisors have. Among these obligations are: preparing the franchisee with the required training for operating the business and adequate participation in that.
  1. Restriction on Goods and Services Offered: The franchisee provides the goods or services with the same quality as the original business, but the franchisor needs to define some restrictions. These restrictions may include required quality standards, approved suppliers, and advertising.

Seeing how clauses and interpretations are applied can give you a better understanding of franchise agreements. Here is an illustrative example of a franchise agreement

These Elements Are Not Exclusive

Remember that contractual franchise clauses are not limited to the ones mentioned above. These elements were exclusive to the franchise, but a few general features are common in almost every contract. Such as the choice of applicable law or the forum selection clause, which according to Alessandro Oliverio, is crucial for dispute settlement. 

So after finding the franchise agreement and the suitable contract for you, it’s vital to use legal advice before entering it.

Licensing vs franchising: 4 Key Differences

  1. Degree of Control: The franchisor has significant control over the business of the franchisee and the operation of the business. However, in a licensing agreement, the licensor can exert little control over the licensee’s business. The licensor can lay out the process of using intellectual property, but they cannot stipulate different aspects of the licensee’s business.
  1. Business Model: Franchising deals with providing services, and licensing is related to goods and products. 
  1. Legal Regulations: The franchisee and the licensing agreement are governed by standard agreement contract law. Generally, a franchisee agreement is governed by federal regulations and specific state laws within international business. It is stringent and complicated, consisting of various moving parts. Licensing agreement is a simple agreement that consists of protected images and marks. 
  1. Process: Licensing involves the one-time transfer of rights in exchange for a fee. No training and support are provided by the licensor. On the other hand, the franchisee agreement contains the duties and responsibilities of both parties in a brief manner. Franchisees assist in setting up a new business, extending an existing one, and increasing brand recognition. 

Licensing vs Franchising: Which one is better?

A executive putting blocks of franchise over one another

In the early stages of business, licensing is an effective tool as a large amount of revenue is generated, and the business gets fast recognition. Licensing helps you in instant marketing, production and allocation, which other companies have spent decades strengthening. This is the best option for businesses looking to make more profit with less costs while running independently. However, as the business expands, licensing can result in legal problems and also gets surrounded by limitations. 

If you want your business to build momentum and increase the market share of the brand, then it’s time to plunge straight into a franchisee agreement. Many businesses opt for this route, as it aids in establishing the brand and increasing online visibility. In addition, it is better because businesses can learn new skills from the franchisor and manage their business simultaneously. 

To Sum Up

The franchise agreement is a great tool for small businesses to grow faster and for great ones to grow even more. Considering the elements mentioned above and, of course, with the help of expert lawyers, you’ll be able to build a binding legal relationship that promotes your business.

Frequently Asked Questions

What Are Different Types of Franchise Fees?

There are a variety of fees that the franchisee is supposed to pay. These include initial franchise fees, royalty fees, national and local marketing fees, and technology fees.

What Law Applies to Franchise Agreements in the USA?

The Federal Trade Commission (FTC) governs franchising legal requirements in the United States. So to conclude a valid franchise agreement in the USA, you should resort to the Franchise Rule. 

Where Can I Find the Best Franchise Opportunities?

The International Franchise Association has the largest directory of available franchise opportunities online.

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