What is a Franchise Agreement? The Complete Start-up Guide – 2022

April 1, 2021

The foundation of your franchise's relationship with its parent company is specified in your franchise agreement. A franchise agreement is a legal contract between a franchisee and a franchisor. The agreement you make with a franchisor determines the details and parameters within which each party will adhere, as it relates to running the business.

Learn everything you need to know about franchising agreements for new franchise business owners in 2021. Find out what the agreement includes as related to business operations, sourcing, corporate identity, training, licensing, and more. And, find out what to look for when signing a franchise agreement for your first start-up.

What is a Franchise Agreement? – 2022 Guide for a New Franchise Owner

If you are new to owning a franchise, the most important document you will encounter is the franchise agreement between you and the franchisor. This agreement is a legally binding contract that establishes many of the obligations and parameters to which both parties will adhere. Under the contract, details are set forth for the authorization to grant legal rights to the franchisee to run and operate the business.

It specifies the area in which your franchise can operate, grants any licenses and legal rights to use copyrighted materials, such as trademarks, logos, and other collateral. And, it defines the obligations of the franchisor to the franchisee, such as providing operation materials and training to the franchisee, as well as access to a network of supply-chains – and much more.

On the other end of the table, the agreement specifies terms by which the franchisee must manage, operate, and maintain the business in adherence to the franchisor's standards. The franchisee also agrees to pay ongoing fees, operational costs, and franchising fees as specified in the agreement. Under the stipulations of the agreement, both parties agree to their end of the deal, and thus, your franchisee rights are legally protected and enforceable – as are the rights of the franchisor.

What is the Purpose of Signing This Agreement?

The purpose of a franchise agreement is to protect the rights of both parties involved: the franchisor and franchisee. For a franchisee, going into business for the first time can be daunting and risky, whereas a franchisor gives you a ready-to-go business model and operational support. But, becoming a franchisee wouldn’t offer these benefits for new business owners if the relationship wasn’t legally binding.

Within the agreement, a franchisor promises to give the new franchisee certain things, like training, operational materials, and ongoing support. And, both parties can always agree to amend the contract at any point down the road, to add stipulations and edit the terms of the agreement. If your franchise financially suffers from a franchisors negligence to uphold their end of the bargain you can take legal recourse for breaching their contract – and vice versa.

What Does it Legally Define Between the Franchisor and Franchisee?

Every franchising contract is different depending on the nature of the business and the wishes of a franchisor. And, though this sort of legal document might seem like convoluted legal jargon, any good legal document is easier to understand than what it might first appear to be. Most standard agreements between a franchisor and franchisee have the following inclusions:

Grant of the Franchise Rights and Terms

The grant of franchise rights is what legally allows a franchisee to operate a franchised business location and use the corresponding trademarked material. It authorizes and licenses franchises to use trademarks, trade dress, and utilize business systems owned by the franchisor. It also stipulates for how long the contract will be in effect, which often is around a 10-year term.

Development Obligations of the Franchisee

After agreeing to the overall grant of franchise rights and terms, the franchisor will stipulate a period in which the franchisee must set-up-shop and open for business. Every contract's terms are different for developing and establishing a franchisee's operational location. It can vary depending on the requirements of the franchisor regarding the franchisee's initial and ongoing operation training.

Franchisee Training and Operational Procedures

Most franchisors require new franchisees to complete an initial operational training program before a location can be established and open. Many franchisors provide ongoing training for franchisees, as well, regarding a range of topics, such as new operational procedures, equipment updates, and more. Furthermore, the agreement lays out the terms and procedures by which the franchisee may operate.

Under the agreements operational procedures, a franchisee may only operate under the business procedures and operational systems specified for use by the franchisor. Any products or services offered under the franchise's brand must be in adherence to the mandates as outlined in the confidential operations manual and instructive materials provided to a franchisee by the franchisor.

Territory Operational Rights and Fees

The franchisee is granted the right to operate within a specified territory. Territorial protection maintains your location's autonomy within the territory and bars others from opening a competing franchise within your territory. Territorial rights may also restrict the territory within which your business may operate, with whom the franchise may conduct business and other protections as specified by each applicable franchisor.

There are several costs associated, as defined in the agreement. An initial franchise fee is the main fee to buy-into the franchise, payable upon signing the agreement. The initial fees may also include licensing and equipment.

Franchisors collect a weekly or monthly royalty fee from each franchisee, the structure of which is defined in the agreement. The most common structure for determining a franchisee's royalty obligations is to take a fixed percentage of gross sales. Alternatively, the royalty structure in an agreement may define a fixed-rate structure.

Marketing obligations and fees are sometimes included as well. Other inclusions to a franchise contract include areas stipulating non-compete clauses, legal rights and jurisdictions, and restrictive covenants. These terms and conditions specify the restrictions to a franchisee against setting up competing businesses in the same jurisdiction as a franchise – amongst others.

At the end of the day, a franchisee and franchisor are entering into a relationship in which both parties are motivated to help the other succeed. And, the agreement by which you adhere is the foundation for the business relationship which ensues. Talk to a Creative Colors International associate to learn more about what’s in a CCI franchise agreement.