A franchise agreement sets out the basic roles and responsibilities shared by a franchisor and franchisee. The document is signed by both parties prior to the sale of the franchise, and it is referred to should there ever be a conflict between the two parties in the future. It is different from the Franchise Disclosure Document (FDD), which is simply a legal document summarizing the investment a franchisee is making. The franchise agreement is like a rental agreement. It delineates who owns what, who has what rights and who has what responsibilities.
Establishment of Trademarks
The first section of most franchise agreements will establish the trademarks owned by the franchise at large. These trademarks and corporate business practices are proprietary, and they may not be used for personal gain without the consent of and compensation to the franchise as a whole. The franchisee is given the right to use the trademarked materials, but the franchisee agrees to pay a fee for their use. Further, the franchisee agrees not to alter or misuse the trademarks in any way not approved by the franchise.
Establishment of Purpose
A second critical element of a franchise agreement is a statement of purpose. This simply means the franchisee and franchisor have a common goal in mind. For example, if the goal of the franchise agreement is to share a mutual profit from the sale of food or clothing, this is stated in the agreement. If the goal is, on the other hand, to provide care for seniors, this goal will be stated in the franchise agreement. The statement of purpose generally answers the question "Why are we signing this document?"
If the franchisee has any financial obligation to the franchise, and he or she nearly always will, the obligation is stated clearly in the franchise agreement. This may include an initial cost to purchase the franchise and any ongoing costs such as profit sharing. If the franchisee will be obligated to purchase marketing materials, corporate documents, furniture, equipment or other outfitting supplies from the franchise in the future, this must be clearly delineated in the franchise agreement. Many agreements may say, "prices subject to change" or "additional products made available upon request and payment." This tells the franchisee there may be certain costs in the future that are not specifically outlined in the original agreement.
Restrictions on Business Activities
If the franchisee is prohibited from engaging in other business opportunities while he or she owns the franchise, it is important to make this clear in the initial franchise agreement. Some franchises will prohibit individual franchisees from owning a franchise in another industry or competitor's business. For example, it is possible for John's Burgers to prevent an owner from buying a franchise of Paul's Hotdogs. Ultimately, the franchisee must agree to these demands if he or she wants to purchase the business. The franchisor will also be limited, however, from causing the franchisee undue harm. For example, the franchisor may be prohibited from selling another franchise within a certain radius of the existing franchise.
Is my franchise agreement terminated when I file bankruptcy?
When a franchisee declares bankruptcy, a franchise agreement may be assumed and assigned along with other debts during the legal proceeding. This would allow the court to decide if the franchisee has any further legal or financial obligation to the franchisor and what that obligation is. If the franchisor would like to prevent the franchise agreement from entering the general bankruptcy filing, it can attempt to void the contract prior to the time bankruptcy is declared. In this case, it would have to show that the contract was broken, and it could move forward with its own actions accordingly.
When is an agency agreement a franchise agreement?
A franchise agreement provides a franchisee the right to operate under the name of the franchisor. The franchisee obtains all legal copyrights of the business, its marketing materials and its business model. An agent, by contrast, is simply an individual authorized to sell another company's product. The agent may sell the product under the name of the original manufacturer or company, but in the end, the agency is operating according to its own business model. A company may place restrictions on when and how its name can be used by an agency, but it does not control an agency to the same level it controls a franchise.