Franchise Agreement


Comments About This Glossary Term

The contract between a franchisor and franchisee, detailing the particulars of their legal relationship, is the "franchise agreement". There is a document like this for every fast food operation, auto tune up, lube, tire or paint company, convenience store or other kinds of businesses that are part of a franchise system. The agreement is meant to summarize all of the responsibilities a franchisee and franchisor have to each other.

Most of the franchisee's protections are available before the franchise agreement is signed, when the prospective franchisee still is evaluating the offering. That's when entrepreneurs considering a purchase in a franchise system - either an existing franchise or a new location - are given details about the parent company's financial status, the business history of the company and its executives - including bankruptcies and business failures. Additionally, the prospective franchisee has the opportunity to talk to other franchisees or former franchisees about their experiences good and bad, with the company. Much of this information is contained in the FDD (Franchise Disclosure Document) previously called the UFOC (Uniform Franchise Offering Circular) which must be supplied to a prospective franchisee before he or she is required to sign any documents or put forth any funds.

Once satisfied with the due diligence examination of a franchise offering and then closing the deal to become a new franchisee, the individual who has bought into the system ordinarily will need to adhere to a number of rules discussed in the franchise agreement. They Include explanation of the costs to be paid by the franchisee, not only the monthly fee due to the franchisor, but also contributions to the advertising funds. The agreement might also require the franchisee to purchase all supplies and inventory from the franchisor, or from "approved" vendors. Additionally, there frequently are restrictions placed on the franchisee about methods of operating, and merchandise that can and cannot be sold.

In return, the franchisee benefits from parts of the agreement that provide the rights to a defined territory, the opportunity to receive advice and management assistance from the franchisor and the franchise campaigns designed to promote the "brand" so each franchisee can be easily recognized among similar businesses.