Business format franchising can be defined as a contractual licence granted by one person to another which:

• Permits or requires the franchisee to carry on a particular business using the franchisor’s know-how under the franchisor’s brand as an independent business;
• Allows the franchisor to exercise continuing control over the manner in which the franchisee carries on the franchised business; and
• Obliges the franchisor to provide the franchisee with ongoing support in carrying on the franchised business.

As a commercial matter, the agreement inevitably requires the franchisee periodically during the period of the franchise to pay to the franchisor sums of money in consideration for the franchise and / or goods and / or services provided by the franchisor to the franchisee.

A franchise is an agreement by which the franchise business (the franchisor) licenses the business operator (the franchisee) to operate a business under the name of the franchisor. The franchisee is authorized to use and market goods or services under the franchisor’s trademarks, service marks and trade names, for a specific length of time.

The logic in buying a franchise is usually that there is significant value in the goodwill and other rights associated with the franchised business model that has previously been developed and operated successfully by the franchisor. This may or may not be the case in a given situation.

Generally, the franchisee will pay an up-front fee as well as continuing fees based on the dollar amount of goods or services sold. The franchisor offers services such as training the franchisee and providing market research to determine a favorable location for the business. The franchisor typically has strict rules and standards as to how business is conducted, the goods and services to be sold and the design and construction of the business location.

Lenders may be more willing to finance the franchisee of a reputable and established franchisor than the entrepreneur desiring to open an unproven business. Although by no means free from risk, a franchise from a franchisor with well-known and well-accepted products or services can significantly reduce business risks and enable you to own and operate a business on your own with no previous training.

If you’re considering franchising, you’ll have to carefully investigate:

• The specific costs;
• Whether financing is available;
• What your expected earnings might be; and
• How long the franchise agreement runs?

Franchise Agreement

The franchise agreement is the cornerstone document of the franchisee--franchiser relationship. It is this document that is legally binding on both parties, laying out the rights and obligations of each. A sample agreement may either be attached to the disclosure statement or presented separately. Either way, you are entitled to receive it as a prospective franchisee five business days before signature. You should have it reviewed by a lawyer familiar with franchise matters--especially since most agreements are extremely one-sided in favor of the franchiser. No one should enter into a franchise and expect to have an evenly drawn contract.

The agreement will contain provisions covering, in considerable detail, the obligations of the franchiser and franchisee regarding operating the business; the training and operational support the franchiser will provide (and at what cost); territory and any exclusivity; the initial duration of the franchise and any renewal rights; how much Franchisee must invest; how must deal with things such as trademarks, patents and signs; what royalties and service fees will pay; tax issues; what happens if Franchisee should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; by the company, operating practices, cancellation, and attorney fees.

The key items of the disclosure statement include:

• Background information on the franchiser and any predecessor;
• The identity and business background of key personnel affiliated with the franchiser or franchise brokers;
• Any prior litigation actions;
• Any bankruptcy history;
• Franchisee's initial franchise fee or other initial payment to begin the operation;
• Other fees, such as service fees, training fees, advertising fees, royalties;
• Any commitment of a franchisee to purchase or lease from designated sources;
• Franchisee's principal obligations;
• Obligations of the franchiser; supervision; assistance; services; Exclusive area or territory;
• Trademarks, service marks, trade names, logos, and commercial symbols; Patents and copyrights;
• Any commitment of the franchisee to personally participate in the actual operation of the franchise business;
• Renewal, termination, transfer and dispute resolution;
• Statistical information and listing of other existing franchisees; and
• Audited financial statements.

There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.

A franchise agreement should achieve three fundamental objectives:

1. Given the absence of specific franchise legislation, it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon.
2. It should seek to protect for the benefit both of the franchisor and the franchisee, the franchisor's intellectual property.
3. It should clearly set out the rules to be observed by the parties.

Reliance on Us

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• Drafting Franchise Agreements
• Compliance with Disclosure Obligations
• State Registration Requirements
• Trademarks and Trade Secret Protection
• Intellectual Property Infringement Actions
• Mergers and Acquisitions of Franchise Systems
• Franchise Agreement Construction and Operation
• Geographic Area Restriction Disputes
• Non-Compete Clauses
• Pricing and Supply Complaints
• Anti-Competition and Unfair Business Practice Issues
• Revocability and Forfeiture of Franchises
• Injunctive Relief to Protect Franchises
• The avoidance of risks in costly franchise disputes

The Terms

As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee and the relationship between them. In this respect the franchise agreement can be said to form the 'engine room' of the whole transaction. If difficulties should arise between the franchisor and the franchisee they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.

What, then, should one look for in a franchise agreement?

A franchisee will look for promises:

• To train the franchisee and his staff;
• To supply goods and / or services;
• To be responsible for advertising, marketing and promotions;
• To assist the franchisee to locate and acquire property and have it fitted out and converted into a franchised outlet. (Similar considerations apply with regard to the acquisition of vehicles, fitting them out, equipping the franchisee etc.)
• To assist the franchisee to set up in business;
• To improve, enhance and develop the business system; and
• To provide certain support management and possibly accounting services.

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Franchisors will be anxious to ensure that the franchise agreement clearly sets out the obligations of the franchisee. A franchisor will therefore wish to:

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• Monitor the performance of the franchisee;
• Protect himself from unfair competition;
• Protect his intellectual property; and
• Impose obligations and restrictions on the franchisee with regard to the exercise of the rights granted by him to the franchisee.