A franchise agreement is the legal “glue” cementing franchisors and franchisees. But before we can understand a franchise agreement, we must understand the parties involved in this transaction. A franchisor is the person or entity that initially owns the tangible property which will be franchised. Put more succinctly, the franchisor owns the rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee a franchise fee in advance for the rights to do business under the franchised name. The franchisor typically collects an ongoing franchise royalty fee from the franchisee.
The franchisee is an individual who purchases the rights to use a company’s trademarked name and business model to do business. The franchisee typically purchases a franchise from the franchisor. As part of this relationship, the franchisee must follow certain rules and guidelines already established by the franchisor. The franchise agreement explains what the franchisor expects from the franchisee in running the business. The agreement also is designed to assure that all franchisees within an organization are treated equally and harbor uniform expectations.
The franchise agreement must be signed by both parties upon completion of the deal to do business together. The agreement contains a number of essential elements.
First and foremost is the contract explanation. It must clearly outline exactly what the franchisee’s rights and obligations are – not just rules and guidelines – including but not limited to the franchisor’s expectations.
Also key is the operations manual. This will detail the guidelines that the franchisee must legally follow in operating the business as outlined by the franchisor. It is important to understand that there are typically numerous amendments added to this section. A non-disclosure clause is also expected to be included as a part of this section, and in fact, the contents of the entire document are usually kept confidential.
Last, but certainly not least in a franchise agreement are proprietary statements which outline and describe how the franchise name is to be used, and typically details marketing and advertising procedures that the franchisee will be required to follow. The section may also enumerate approximately, if not precisely, how much the franchisee will be required to contribute toward a national advertising budget – should this be relevant.
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Jack Zinda is an Austin business lawyer with Heselmeyer Zinda, PLLC. To learn more about Austin business attorney Jack Zinda visit http://www.texasbusinessattorneys.net.
