What is a Franchise Agreement

When a business wants to set up more locations but lacks the resources to set up and manage each one themselves, they can choose to franchise new locations instead.

Franchises are joint ventures between the franchisor, who owns the business and its associated trademark, and franchisees. Franchisees buy the right to use the business' trademark in order to practice business under that franchise's name. The franchisee's business can use the name, follow the same business model, and sell the same products as the franchisor's original locations. In exchange, franchisees usually pay royalties, or a portion of their profits, to the franchisor.

Franchise agreements are the legal documents that define and manage this type of business relationship. This is everything you should know about these important agreements, including how they work, what they include, and how to manage them effectively.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice.

What is a franchise agreement?

A franchise agreement is the legal contract governing an agreement between the owner of a franchise and the party they allow to operate one or more of their franchised operations. A franchisor prepares a franchise agreement for the franchisee to sign before they can begin to operate as one of the franchise's businesses.

Franchise agreements include legal terms and regulations for how to use trademarks and operate businesses that bear the franchise's name. By signing these agreements, franchisees agree to follow these rules while operating their business.

Along with operational rules, franchise agreements also specify the other terms of the agreement, including how long the agreement lasts, any limits to which the franchisee can and cannot use the franchisor's trademark, how the franchisee will pay the franchisor for the right to use their trademark, and more.

When and why do you need a franchise agreement?

A franchisor will need to create a franchise agreement whenever they are in the process of negotiating with a franchisee. Though the ultimate agreements may be similar to each other, each relationship with an individual franchisee should have its own franchise agreement.

Franchise agreements are important because they establish the rules both parties must follow during their franchising relationship, both officially and legally. By creating and maintaining an accurate record of these rules, both parties will know how to handle questions that may come up during the course of business. They are also extremely important for mediating conflicts that may arise between the franchisor and franchisee.

What are some different types of franchise agreements?

There are four main types of franchise agreements:

1. Single-unit agreements: The franchisee is allowed to operate a single location or "unit" using the franchisor's name, trademarks, products, and model. The franchisor frequently even provides training and other support to help the franchisee get started and fulfill the requirements specified in the agreement. In exchange, the franchisor is entitled to royalty payments of the franchisee's profit. This is the most common type of franchise agreement.

2. Multi-unit agreements: The franchisee is allowed to open and operate more than one franchise unit in different locations. The territory within which a franchisee can operate their units may or may not be specified in the agreement, usually based on whether or not other franchisees are already operating in other areas. The franchisor is entitled to royalty payments from each location.

3. Area development agreements: The franchisee is allowed to open a specific number of locations within a defined territory and timeframe. Under these agreements, the franchisee is also called the area developer, and agrees to pay a development fee in addition to the initial franchising fee. In exchange for paying this fee, the franchisee is usually allowed to open additional units in the future and to have exclusive rights to operate franchises within that territory.

4. Master franchise agreements: In addition to the rights extended to the area development in area development agreements, franchisees who sign a master franchise agreement also have the right to sell the franchise locations they establish within a certain geographic area.

What is included in a franchise agreement?

Your franchise agreements should include all of the following information:

• Identifying particulars: The name and contact information of both the franchisor and franchisee parties.

• Definition of franchise: A formal definition of the trademark(s) of interest in the franchise agreement and how they may and may not be used.

• Grant and term: Specifications of when, where, how, and for how long the franchisee will be allowed to use the franchisor's trademarks.

• Payment terms: How the franchisee will pay the franchisor for the right to use their trademarks. Depending on the type of franchise agreement, this could be a combination of one-time fees, development fees, and ongoing royalty payments.

• Brand manual: An exhaustive, prescriptive set of rules and guidelines on how the material to be franchised within the agreement can and cannot be used by the franchisee.

• Advertising: How the franchisee will and will not be allowed to use the franchise's trademarks to advertise their company. Franchise agreements frequently set a minimum amount the franchisee must spend on advertising.

• Development schedule: In area development and master franchise agreements, this will specify the timing in which the franchisee must develop their new franchise locations.

• Insurance: Outlines the responsibilities and obligations both the franchisor and franchisee have for protecting the other party from liabilities, losses, and insurance claims.

• Transfers: When applicable (such as in master franchise agreements), the franchisee may be able to transfer their franchise location to a new franchisee. In such cases, this section specifies the process to be followed in that case.

• Termination clauses: Lists the situations in which the franchisor or franchisee could end their agreement prematurely, and the consequences for doing so.

• Despite resolution terms: Clarifications on how any disputes that may arise between the franchisor and franchisee will be resolved.

Docusign IAM is a platform that empowers you to connect and optimize every step of your agreement processes, including creating agreements, sending them for eSignature, and managing them in an intelligent repository.

Learn more about Docusign IAM.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice. Laws frequently change and this information may not be current or accurate. Docusign disclaims all warranties of any kind with respect to this material including merchantability, fitness for a particular purpose, or accuracy. You should consult with a licensed attorney in your area for legal advice.

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