6 Essential Elements of Franchise Agreement | LegaMart Articles
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6 Essential Elements of Franchise Agreement

Franchise agreements may seem simple in terms of definition, but there are several essential elements you should consider while drafting one. Location, Duration, Operation, Fees, and Use of Intellectual Property are a number of necessary sections of a franchise agreement. However, this basic knowledge wouldn’t be enough for concluding such an important contract and a safe legal relationship obviously requires expert legal advice by lawyers.

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 as they have when tasting McDonald’s fast food. But how can it make that happen in a legal way? Is there a contract to entitle the owner to that? And if so, how should it be drafted?

What Is a Franchise Agreement?

As defined by Wikipedia, the franchise agreement is a contract based on which the franchisor entitles the franchisee to operate a business, or offer, sell, distribute goods or services identified or associated with the franchisor’s trademark, so the franchisor’s business is basically duplicated. By entering into a franchise agreement, the franchisor will have the chance to 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.

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Don’t Confuse It With Licensing Agreement!

The owner of that Canadian restaurant is wondering 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 make sure to 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, in addition to the right to use its trademark. So in the question mentioned above, 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 meal.

You may also like to read the article below:
Franchise or License: Pros and Cons

How to Draft a Franchise Agreement?

Finding franchise agreement as to the right choice for you, there are 6 essential elements you need to include in your contract:

1. Use of Trademarks

A crucial subject of the contract is defined under this section. The specific trademarks, service marks, or logos that a franchisee is allowed to use should be listed in this section.

2. Location of the Franchise

If either of the parties intends to limit the use of the given trademark to a certain territory, this should also be mentioned in the contract

3. Term of the Franchise

The franchisor might want to limit the duration in which the franchisee is allowed to use the given rights. This time period must be specified as well so that both parties are aware of the duration of their rights and obligations.

4. Franchisee’s Fees and Other Payments

Paying fees is the major obligation the franchisee has in exchange for the rights it receives. These fees may be paid one time or periodically. Since there are a variety of fees a franchisee may pay, it’s necessary to consult with a lawyer before making yourself obliged to them by signing the contract.

5. Obligations and Duties of the Franchisor

There are a few common obligations that normally all the franchisors have. Among these obligations are: preparing the franchisee with required training for operating the business and adequate participation in that.

6. Restriction on Goods and Services Offered

As mentioned before, by entering into this agreement the franchisor basically duplicates its business. So in order for the franchisee to provide the goods or services with the exact same quality as the original business, the franchisor needs to define some restrictions. These restrictions may include required quality standards, approved suppliers, approved advertising, etc.

Attached here you can find a template of the franchise agreement. This template is only for illustrative purposes and should not be used. Your suitable franchise agreement should be drafted by your lawyer.

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These Elements Are Not Exclusive

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

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

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 the Most Common Franchised Industries?

According to franchise.org, franchises operate in virtually every sector you can imagine. In addition to a large presence in the restaurant and hotel sectors, the most commonly franchised industry categories include service-related fields.

What Are Different Types of Franchise Fees?

There are a variety of fees that the franchisee is supposed to pay. These fees 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 in order 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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