Reviewing a Franchise Agreement
You have decided to buy a franchise which means entering into a franchise agreement. A franchise agreement is a contract which sets forth the terms that will govern the relationship between the franchisor and franchisee. It identifies the parties’ rights and obligations during the franchisee’s ownership and operation of the franchise. The agreement also describes certain post-termination rights and obligations. It is an essential document which franchisees should discuss with a skilled franchise attorney in order to protect their rights and understand their responsibilities.
Lusthaus Law has extensive experience helping franchisees understand how each provision will impact their business and advocate on their behalf to get beneficial terms when possible.
Key Provisions in a Franchise Agreement
- Grant of franchise and license
The franchisor gives the franchisee the limited, non-transferable, non-exclusive right to use the franchisor’s trademarks, logos, services marks and systems of operation for the designated period of time.
The franchisee is granted the right to operate in a certain territory, which may or may not be exclusive.
- Term and renewal
This provision sets out the length of the agreement and the requirements and terms for renewal.
- Payments to franchisor
The franchisee will be required to pay an initial franchise fee as well as a monthly royalty and other specified fees set forth in the agreement.
- Franchised business location
The address of the franchised business.
- Duties of franchisor
This provision will outline what services the franchisor is providing to help support the franchisee before and after operations begin. Much of this will also be included in the Franchise Disclosure Document.
- Duties of franchisee
This will include the obligation to operate in accordance with the franchisor’s specifications, sell specified products and services, and engage in certain advertising.
- Confidential information
The franchisee must agree to keep information confidential.
Typically, this includes a non-compete provision. The franchisor will teach the franchisee how to operate the business and in exchange, the franchisee agrees not to take that training and information and use it to compete with the franchise system.
- Assignment and transfers
Before a franchisee can assign or transfer the business, it must meet specific requirements set forth in this provision.
- Right of first refusal to acquire franchisee’s business
Most franchisors want to preserve the opportunity to buy the business back before the franchisee attempts to sell to a third party. This provision gives the franchisor the right, but not the obligation to buy the franchisee’s business.
- Principal marks and copyrighted information
This provision identifies trademarks that the franchisee will use in the operation of its business and the limits of that use. For example, the franchisee cannot use the franchisor’s name in its corporate name. It can only acquire a DBA (Doing Business As).
- Relationship of the parties
Franchisees are treated as independent contractors of the franchisor. They are not employees or agents of the franchisor.
- Default and termination
These provisions designate what actions constitute a breach under the franchise agreement. Some of these may result in automatic termination while others may require that the franchisee be given an opportunity to cure.
- Unavoidable delay or failure to perform (force majeure)
There is typically no breach under the agreement if there is a delay or failure to perform an obligation due to an Act of God.
- Waiver and delay
The franchisor’s failure to take steps to enforce its rights under the agreement will not operate to prevent it from doing so at a later point in time. For example, if a payment is late and the franchisor does not impose its late fee, it can still impose the late fee if the franchisee has a second late payment.
- Notice of franchisor’s alleged breach and right to cure; and period to bring claim
If the franchisee alleges a breach by the franchisor, it must give the franchisor notice and the opportunity to cure. Following that, the franchisee has a limited period in which to bring a claim against the franchisor.
The franchisor can seek to stop a franchisee from conduct such as engaging in competitive activities. By requiring the franchisee to agree to an injunction in advance, it will make it easier for the franchisor to get the injunction in court.
The contact information where notices should be sent and the method of giving notice are specified in this provision.
This is a catch-all for any terms not covered elsewhere.
- Costs of enforcement; attorneys’ fees; governing law; jurisdiction and venue; consequential and punitive damages and jury waiver
In the event of a lawsuit, this provision establishes what law applies, where the suit will be brought and other litigation-related issues.
Typically, franchisees operate the franchise as a business entity. However, the franchisor will want the franchisee’s owners to personally guaranty the obligations of the franchisee business entity.
- Franchisee’s representations and acknowledgments
The franchisee represents and warrants that it has read the agreement and has the right and power to execute the agreement.
Franchisees should have legal representation, so they understand the terms of the agreement and whether it provides the necessary legal protections for their business. Lusthaus Law has a long history of guiding franchisees through the process of reviewing and negotiating franchise agreements. If you are considering buying or selling a franchise, contact us for a consultation.