The franchise contract is a very important document. As a legal commitment binding on both the franchisor and franchisee, it defines every aspect of the franchisor-franchisee relationship. If you are buying a franchise, make sure you thoroughly review all franchising contracts and are advised by a competent lawyer with deep experience in the franchising industry.
Buying into a franchise is a major decision for any small business owner. Like any other major business decision, the purchase of a franchise is governed by a multitude of stipulations and conditions.
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Not surprisingly, these stipulations need to be translated into a legally-enforceable document for the protection of all parties involved.
The most important legal document that arises in conjunction with buying a franchise is the franchise contract. The franchise contract comes into play at the very end of the buying process – after the franchisee has done all of the necessary research and received answers to all of the relevant questions. It is the last step in the process and it spells out the details of the deal, including the nature of the ongoing relationship between the franchisor and the franchisee.
Franchise contracts are generally comprised of two parts: The Purchase Agreement and the Franchise (or License) Agreement. The Purchase Agreement describes the upfront transaction, detailing the terms of initial purchase. The Franchise Agreement, on the other hand, describes the terms and conditions of the franchise relationship on a go-forward basis.
Sometimes these sections are clearly separated, and sometimes they're not. In either case, rest assured that your franchise contract will contain both elements.
The Purchase Agreement
There are three primary issues that should be addressed in the Purchase Agreement. First, the Purchase Agreement should clearly state the initial purchase price of the franchise. This seems obvious, but if your franchise contract seems ambiguous about the price in any way, don't sign it! Get the clarification you need first.
Second, the Purchase Agreement should also include details about the franchise package, i.e. the equipment and inventory you can expect to receive when ownership is transferred. The franchise package varies from franchise to another. Just make sure it includes everything you've been promised.
Finally, the Purchase Agreement should discuss the initial services the franchisor will provide once you own the franchise. These services can include (but aren't limited to) training, site selection assistance, and marketing services.
The Franchise (License) Agreement
The Franchise Agreement contains a lot of information, all of which pertains to the ongoing operation of your franchise. One of the things you can expect to find here is coverage of the rights included with your purchase. The kinds of rights you can expect to receive with your franchise include rights to trademarks, copyrights, territorial exclusivity, recipes, "secret formulas", etc.
A good franchise contract will also discuss the obligations imposed on both the franchisor and the franchisee. Franchisor obligations include everything you can expect to receive from the franchisor on an ongoing basis. Franchisee obligations include a wide range of restrictions placed on you including issues related to operations, advertising, training, insurance, cleanliness, corporate image, suppliers, etc. There should also be details about the amount of royalties and fees you will pay the franchisor after your franchise opens for business.
One last thing to look for in the Franchise Agreement is something about what happens when the relationship between the franchisor and the franchisee terminates. You never know what the future will bring so make sure you understand and agree with the termination process as stated in the contract.
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