A franchise agreement is the written contract between the franchise company and the franchisee. It is a binding, legal agreement that serves as the basis for the entire business arrangement. It lies out and specifies pricing, responsibilities, obligations and the rights of both involved parties. Each franchise agreement is different based on the company and franchisee. Some companies have more extensive contracts while others are relatively simple.
Due to the amount of information in a franchise agreement and the legality of the document, it is crucial to have a quality document between you and the company you are purchasing the franchise from. The more collaborative and comprehensive the agreement is, the clearer expectations are for both parties. For example, many franchise agreements include which party is responsible for which costs when it comes to start up and maintenance of the franchise. The company and the franchisee both know exactly what is expected of them monetarily.
Quality Franchise Agreement
A quality franchise agreement will also explain specific regulations that must be followed. In food-based franchises there are a number of health code and cleanliness regulations that the franchisee must enforce. In more general terms, there can be regulations in the agreement when it comes to business hours, accounting procedures and selling the franchise. Staying compliant will keep you and your franchise out of trouble with the company as well as the government.
All costs associated with buying and running the franchise should also be included in the franchise agreement. Start up costs as well as training fees, royalties, product mark-ups and marketing dues should also be written out and explained so you know exactly what this business venture will cost. In addition to hard numbers, there should also be explanations of how the costs are calculated and if any changes are expected.
Owning a franchise
Since owning a franchise is an independent extension of a larger company, there will surely be things that as an owner you are not able to do. For example, your franchise agreement might include that you are not allowed to change product pricing or the hours of operation. Going against the agreement could result in a breach of contract and significant issues between you and the franchise causing anywhere from fines to termination of the agreement, each with financial repercussions. On the other hand, a good agreement will clearly explain what, as a franchisee, you can do within the scope of the contract when it comes to running your business.
A quality franchise agreement will be extensive and explanatory. You and a representative from the franchise should go over the agreement in detail answering any questions you might have. Most importantly, ensure you understand your obligations when it comes to the investment and coordinating the franchise. While most agreements are strict, there is always potential to negotiate if you see fit before signing.