In Short
- A franchise agreement is a legally binding document outlining the rights and responsibilities of both you and your franchisee.
- Key clauses include grant of rights, assigned territory, fees, and approved suppliers.
- A well-drafted agreement ensures consistency, protects your intellectual property, and provides a clear operational framework.
Tips for Businesses
When creating a franchise agreement, ensure it covers essential terms such as intellectual property use, fees, and territory. Be clear on the responsibilities of both parties, and set out the procedures for conflict resolution, training, and support. If you need help, consider seeking advice from experienced franchise lawyers to ensure all legal aspects are covered.
As a successful business owner, you may want to expand your business through franchising. Although you may be eager to find franchisees and locations, there are some points to consider first. One of these factors is the franchise agreement, which you should prepare before onboarding any franchisees. Your franchise agreement is key to outlining how your franchise will run and is a critical aspect of your relationship with your franchisees. This article will outline what a franchise agreement is and its possible terms.
What is a Franchise Agreement?
A franchise agreement is a legally binding document that specifies the terms and conditions applicable to the franchise. There may also be a guarantor (a person who guarantees the franchisee's performance), and the franchise agreement will set out the scope of that guarantee. Moreover, it includes your and your franchisee's rights and obligations. As such, the agreement must be in writing to govern your franchises.
The primary purposes of a franchise agreement are to:
- protect your intellectual property (such as trade marks and patents);
- clearly establish what is required of each party; and
- provide consistency across all your franchises.
As a result, some basic terms a franchise agreement may include are:
- parties of the agreement;
- grant of rights;
- intellectual property (IP) ownership and use;
- duration of the franchise agreement;
- fees;
- assigned territory;
- approved suppliers;
- premises criteria;
- training and support;
- advertising;
- term and renewal rights;
- dispute resolution; and
- termination and obligations arising on termination.
Some of these terms will be expanded upon below.
Terms of a Franchise Agreement
Grant of Rights
With a grant of rights clause, you give the franchisee a right to operate the business using your franchise systems and IP. Your IP may include:
- brand names;
- trade marks;
- patents; and
- copyrights.
Usually, this clause will specify how long the grant will last and whether it is limited to a particular area.
For example, you could specify that the grant of rights will only last for three years and is limited to the Newmarket region of Auckland.
Notably, the franchisee can hold the rights longer if the agreement contains a renewal clause. Moreover, the rights may last for a shorter time if a party terminates the agreement.
Assigned Territory
Many franchisors use the franchise agreement to assign a particular location or area where the franchisee can operate. This is known as the territory. This clause aims to ensure that your franchises will not compete against each other. As a result, your franchisees will feel more comfortable, and you can expand your business more efficiently. The following are some ways in which you can word a territorial clause:
- Franchisee gets an exclusive territory, and you cannot grant another franchise within that territory. The franchisee also cannot operate outside the area.
- The franchisee gets a territory, but you can grant another franchise within the area in specific circumstances. Moreover, the franchisee cannot operate outside the territory.
- You grant the franchisee a territory, but in certain circumstances, you can reduce their territory by adjusting the boundaries or granting another franchise in the area.
- Any of the three above, but the franchisee has the first right of refusal when you want to grant an additional franchise in the territory.
Fees
A franchisee will typically pay three types of fees under the agreement:
- initial franchise fee;
- ongoing fees; or
- one-off fees.
The initial fee is usually payable after signing the agreement. As a result, the payment will cover some initial start-up costs and will confirm the grant of rights.
Meanwhile, ongoing fees are payable regularly, such as monthly or periodically. This can cover the franchisee's costs, using your intellectual property and any support or training you provide. It can also either be a fixed amount or percentage based (for instance, percentage of gross revenue). Fees will cover any advertising and marketing costs so you can promote your business and its systems as a whole. Moreover, you can calculate the fee as a percentage of the franchisee's gross revenue or a fixed monthly amount.
Lastly, one-off fees cover assignment or transfer fees. This is payable when the franchisee transfers the business or renews the agreement.
Approved Suppliers
Often you will have supplier contracts and trusted organizations from which you buy your materials. The materials you use translate into your franchise's success, making it essential that the franchisee uses the same suppliers. As a result, you can restrict what products and services the franchisee sell and where they get their materials or products.
However, it is important to note that you should include a provision stating what happens if the franchisee cannot obtain products or materials from the approved suppliers. You may want to allow your franchisee to source products from a different supplier with your approval.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
A franchise agreement is a legally binding document that outlines your and your franchisee's rights and obligations. The agreement works to protect your intellectual property and ensures that your franchisees have the knowledge and resources to replicate your success. You can include several terms, but there are some key ones. Clauses such as grant of rights, assigned territory, fees, and approved suppliers are essential.
If you need help writing a franchise agreement, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee.
Frequently Asked Questions
What is a franchise agreement?
A franchise agreement is a document between you and your franchisee outlining terms such as franchisee rights and obligations, duration, territory, and fees.
What is a grant of rights clause?
A grant of rights clause provides your franchisee with the ability to use your franchise systems and IP to run their business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
