The basic features of the relationship between the franchisor and the franchisee are embodied in the franchise contract. This is typically a complex document, often running to several pages in length.
Because of its extreme importance in furnishing the legal basis for the franchised business, franchise contracts should ever be signed without legal counsel. Here we provide some major terms and conditions of the franchise agreement.
Terms and conditions of the franchise agreement
A good basic franchise agreement will stipulate the conditions for both parties, and will contain information on:
- Fees and initial cost
- Product service method stipulations
- Restriction upon purchase of materials
- Record-keeping requirements
- Life of Franchise
- Location and territorial rights
- Training Provisions
- Controls of operations and performance standards
One of the most important features of the contract is the provision relating to termination and transfer of the franchise. Some franchisors have been accused of devising the agreement that permits arbitrary cancellation.
It is reasonable, of course, that a franchisor should have legal protection in the event a franchisee fails in a substantial way to obtain a satisfactory level of operation or to maintain satisfactory quality standards.
However, it is important to avoid contract provisions that contain overly-strict cancellation policies. Similarly, it is important that the rights of the franchisee sell the business to be clearly stipulated.
Major Contractual Obligations
Showing the Obligations of the Franchiser and the Franchisee
Some other terms of the franchise are explained below:
1. Franchisee: An individual who obtains the right to operate a market under the franchisor’s name and arrangement.
2. The franchisor: The parent organization that allows people to start and run a business using its trademarks, goods, and processes, normally for a fee.
3. Franchise Fee: The original fee refunded to a franchisor to convert a franchisee, outlined in Item 5 of the Franchise Declaration Document (FDD).
For any franchises, this is a flat, one-size-fits-all fee; for others, it alters based on territory size, experience, or other portions.
Many franchisors offer franchise fee reductions for veterans, minorities, or subsisting franchisees.
4. Franchise Disclosure Document: All franchisors are expected by the U.S. Federal Trade Commission to implement this legal document to considered franchisees.
FDDs are updated yearly and consist of 23 sections, called parts, which explain the company story, the fees and costs, contractual responsibilities, unit data, and more. Don’t make a move without analyzing it.
5. Startup cost/initial investment: The total amount obligated to open the franchise, drew in Item 7 of the FDD.
This includes the franchise charge, along with other startup investments such as real estate, equipment, amounts, business licenses, and working money.
6. Royalty fee: Most franchisors expect franchisees to pay a fee on a regular basis (weekly, monthly, or yearly). Usually, it’s a portion of sales; sometimes it’s a flat tax.
Some franchisors also lack a separate royalty fee to cover broadcasting costs.
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