An agreement wherein the franchisor agrees to lend the trade name or business system to another person or entity (the franchisee).
WHAT IS A FRANCHISE AGREEMENT?
It is a legal contract between a franchisor and a franchisee. The agreement’s content can vary depending upon the franchise’s system, the state jurisdiction of the franchisor, the franchisee, and the arbitrator. It provides the investor with a product, a branded name and recognition, and a support system.
ADVANTAGE
- Sets Standards A franchise agreement allows the franchisor to set a standard of quality with regard to the various aspects of a business before signing on the franchisee.
- Brand Control Through such an agreement, the franchisor can specify the way in which the franchisee uses the brand, including the penalties in case of violation of the rules.
Franchise Disclosure Document (FDD), disclosures required by state laws, parties defined in the agreement and Recitals, such as Ownership of System, and Objectives of Parties.
FAQ
1. What is a Franchise Agreement?
It is an agreement between a franchisor and a franchisee whereby the franchisor agrees to lend the trade name or business system to the franchisee.
2. What is franchising?
Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.
3. How can franchisors select good franchisees?
There are some basic points that should be taken on board by new franchisors in their recruitment practices: • To avoid the common mistake made by the franchisors in selecting the first few franchisees that is not to select the franchisees in haste. They compromise on the criteria they have decided on for their ideal franchisee profile which is to be avoided. • It is important for the franchisor to know that from where the franchisee gets its funding, so that it can be satisfied that the franchisee’s personal circumstances do not make the franchise an untenable business proposition. • If a potential franchisee is too entrepreneurial this can cause substantial problems for the franchisor. Therefore, the franchisor must look into it.
4. What information should a franchisor request from the franchisee?
- Career and employment history. • Details of the type of business previously operated. • Details of parent, subsidiary and group companies. • Financial records, accounts, balance sheets, loans, assets – both movable and immovable – and any charges on them, types of creditors, details of bankruptcy/insolvency etc. • Background on directors, officers, shareholders and key employees.
5. What information should a franchisor give to a prospective franchisee?
- Type of business, its corporate structure including whether it is a part of a group of companies or one company. • Business experience of the franchisor and its directors and officers domestically and internationally. • Type of franchise business format, product line etc. • Accounts and financial status, along with information on any loans, Loans Now personal loans, charges on assets, creditors, details, and any bankruptcy/insolvency proceedings to which the franchisor and its directors have been subject. • Litigation it has been involved in, both in civil and criminal law. • Reputation of its brand name or goodwill and any public figure who may be associated with it. • Funds to be paid to the franchisor by franchisees, whether lump sum payments, royalties, technical fees, and other recurring fees and payments.
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