A franchise agreement is a contract between a franchisor and a franchisee. It formalises and details the terms of the legal relationship between the parties.
Key elements of a franchise agreement:
Fees: The initial franchise fee and royalties paid regularly to the franchisor.
Franchise site: The franchise’s location will be specified and there may be an exclusivity provision preventing another franchise from operating within a particular geographic limit of the franchise and also restricting the franchisee from operating outside of that area.
Restraint period: A franchisee will often be restricted from opening a competing business for a certain amount of time following the end of the franchise agreement.
Supply requirements/restrictions: The agreement may place requirements on where the franchisee can source supplies. These restrictions may make supplies more expensive and should be taken into account when assessing the profitability of the franchise.
Operation of the franchise: Specific terms on how the franchise is to be run in terms of the services or goods supplied, the operation of the franchise and pricing.
Franchisor’s and franchisee’s rights and obligations: These provisions will be very particular to the specific franchise agreement. Below are some examples of what could be included:
- The franchisor is generally obliged to provide training and ongoing support to the franchisee.
- The franchisor may detail certain expectations, such as a performance criteria, for the franchise.
- The franchisor may include a right to audit the franchise.
- The franchisee may be obliged to keep particular records which the franchisor can review.
- The franchisee may be obliged to have certain insurance.
Marketing plan: The agreement will detail a marketing plan. This could include a marketing expenditure requirement that the franchisee must reach on a regular basis. The franchisor may establish a marketing fund and the agreement would detail how these funds are contributed to and used.
Intellectual property rights: This will detail the franchisor’s ownership of the business’ intellectual property, such as the business name and logo. It will outline the franchisee’s ability to use this intellectual property.
Confidential information: The franchisor may specify that certain information about the business must be kept confidential and this may be ongoing when the agreement ends.
Legal obligations: The agreement will likely detail the parties legal obligations (and associated costs) arising out of the operation of the franchise. For example, the franchisee’s legal obligations to any employees who are hired.
Dispute resolution process: The Franchising Code details a dispute resolution procedure which the Agreement will generally refer to. Under the Code, the Agreement cannot require mediation to be brought outside of Australia.
Term and end of agreement procedures: This section will state the term (duration) of the agreement and the processes and fees for terminating, renewing or extending the agreement. It may detail terms for selling the franchise and any assignment fee consequently owed to the franchisor.
Franchise agreements include critical legal rights and obligations which can impact the strength and success of the franchisor/franchisee relationship. The obligations can also be ongoing (such as restraints) even after the agreement ends. It is important the agreement is read together with the Information Statement, Disclosure Document, Franchising Code of Conduct (discussed here) to fully understand both the franchisor’s and franchisee’s obligations.