To solidify the franchise endeavor, it is necessary for the franchisee to enter into a legally binding agreement with the franchisor. The document that seals the franchise relationship is called the franchise agreement. It assesses the rights and obligations of both parties, and a sample agreement should either be attached to the disclosure statement or provided separately. If issues ever arise during the duration of the franchisee/franchisor contract, both parties would need to go back to this document to review their rights and obligations as outlined in the agreement. In any event, it should be received by the prospective franchisee five business days before the signing.

First and foremost, the franchisee should evaluate whether the terms set forth in the franchise agreement are consistent with those stated in the disclosure statements. If there are conflicting terms, then those matters need to be addressed and re-negotiated. Depending on the franchise, certain provisions may or may not be open to revision.

A franchise agreement should accomplish the goal of clearly and legally defining the franchisor/franchisee relationship. It should precisely define the terms therein, protect the best interests of both parties, and clearly state the rules of their mutually binding agreement. There is no standard franchise agreement, as the conditions of the agreement will vary from franchise to franchise. There are, however, basic provisions that are typically addressed.

The fundamental conditions of a contract should concentrate on contract duration, financial investment as well as ongoing fees and royalties, taxes, legal fees, and operating protocol. Some of these items may be negotiable, such as pricing, length of contract, or payment schedule. The agreement will also describe the franchisor’s other expectations of the franchisee. They will expect to be able to track the franchisee’s performance, ensure the protection of the franchisor’s intellectual property, and define the restrictions of the use of the rights granted to the franchisee by the franchisor. There are other more complex issues that need to be addressed in the document, like resale options, death or incapacity of the franchisee.

The franchisee should peruse the document for the services and duties the franchisor agrees to provide in return for their investment. These include things like training, supply of goods and services, and promotional and advertising support. The franchisor will also describe their responsibilities in assisting the franchisee to find a business location, setting up the business, establishing sales territory, and developing the business system.

The franchisor must protect their rights of intellectual property, and the franchise agreement will contain specific terms to accomplish this goal. This protects valuable assets such as the trademark, copyrights, trade name, and classified information of the franchisor from infringement by unauthorized third parties. These protective measures also shield the interests of the franchisee, as he/she will also have a vested interest in the safeguard of the brand name to which they have devoted their monetary resources. While some aspects of the contract may be negotiated, intellectual property terms are fairly concrete in nature.

Contained within the document should also be provisions that address franchise renewal and termination policies. There will be guidelines for what the franchisor expects, and the consequences if the franchisee does not comply to those standards. Failure to adhere to standards of quality, meet sales quotas, or other conditions specified within the contract can result in contract termination or non-renewal. At the end of the contract period, there will typically be a re-negotiation of the original contract terms, if the both parties opt to renew their agreement.

The franchise agreement is a multifaceted contract, which is a reflection of the complexities involved in a franchise relationship, and should be taken very seriously. It would be advantageous for both parties signing the franchise agreement to be sure that they understand and are in full compliance with the terms set forth in the document. The assistance of legal or professional counsel can prevent future issues. They might be able to foresee issues that could potentially arise later in the term of the contract, and resolve those issues in the document before it is signed. Once the document is signed, further revisions or negotiations would require use of additional time, money, and other resources. If both parties feel the agreement is fair and mutually beneficial, then the resulting partnership will have a much smoother and more amiable life.