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The following excerpt is from Rick Grossman’s book Franchise Bible. Buy it now from Amazon | Barnes & Nobel | itunes | IndieBound
The franchise agreement is the contract between the franchisor and franchisee, but it is not a “standard” or “form” agreement. The format of the contract differs from one franchise system to another.
While each franchise agreement will differ in style, language, and content, all franchise agreements have covenants, each of which spells out a promise, right, or obligation that the franchisee or franchisor owes to the other or that benefits the franchisor or franchisee. The following is a list of those covenants that are most commonly seen in a typical franchise agreement. (The franchise agreement on our accompanying website will have the specific language pertaining to each covenant.)
Related: Are You Considering Franchise Ownership? Get started now and take this quiz to find out your personalized list of franchises that suit your lifestyle, interests and budget.
1. Franchise Grant
The “Grant” section informs franchisees that the franchisor grants them the limited, non-transferable, non-exclusive right to use the franchisor’s trademarks, logos, service marks (commonly referred to as the Marks), and the franchisor’s operating system (often the System) for the period specified in the franchise agreement. The franchisee does not acquire any ownership rights in the brands or the system and the franchisor always reserves the right to terminate the license to the franchisee for violation of the franchise agreement.
2. Opening Date, Territory Restrictions, Expansion and Similar Rights
This covenant describes the franchisee’s territory (whether exclusive or not) and establishes a time frame for the franchisee to find a physical location, have plans for the unit approved, and build out and open it. Other things can also be listed in this section, such as the computer equipment needed to run the business and the like.
Related: The 23 items that are the heart and soul of the franchise disclosure document
3. Costs and required purchases
This section lists the fees that are described more specifically elsewhere in the agreement. The fees include the initial franchise fee, any fees paid to the franchisor prior to opening, any fees paid to the franchisor during the term of the franchise, any advertising fee obligations and the like.
4. Advertising
In this section, the franchisor must reiterate the franchisee’s advertising obligations as stated in clause 11 of the franchise agreement (and the fees for this are stated in clauses 5, 6, 7, 8 and 11 – as applicable).
5. Duration and Renewal
This covenant specifies the term (duration) of the franchise agreement, measured from the date of signature of the franchise agreement to the date that the franchise agreement expires. If renewal rights are granted, this section also sets forth the requirements of this arrangement.
6. Services Offered by Franchisor
While not all franchisors will repeat the pre-opening and post-opening services they provide to the franchisee in the franchise disclosure documents, proper principals will require these things to be repeated in the franchise agreement. However, including them in the franchise agreement removes the specter of lawsuits as a way to include rights in the contract not otherwise stated.
7. Protection of Proprietary Information, Brands and Other Intellectual Property
As discussed in the “Franchise Grant” section earlier, the franchisor only grants a temporary license to the franchisee. Most franchisors will enforce this understanding by adding specific language identifying each item that is part of the proprietary, confidential, and trade secret information and then stating the restrictions on the franchisee’s right to use such information. It is an important protection for the franchisor and is usually not a covenant that is missing from the franchise agreement.
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8. Education
This section should list all training offered by the franchisor, including any additional training, seminars, meetings, and the like that the franchisor requires or encourages the franchisee to attend.
9. Quality control
As the name suggests, franchisors will address the specific quality control requirements of the franchisee. This is sound franchising and is necessary to ensure that the goods and services offered throughout the system meet the franchisor’s minimum requirements.
10. Transfers
Virtually all franchise agreements govern the franchisee’s right to transfer its interest in the franchise relationship. This section lists the requirements for a transfer.
Related: The Anatomy of a Franchise Disclosure Document
11. Shortcomings, Compensation and Complaint Limitations
All franchise agreements list the violations of the franchise agreement that will be treated as a violation. These violations can be divided into violations that lead to the immediate termination of the franchise agreement, for which no cure is provided, and violations for which a cure is provided.
12. Obligations upon Expiration or Termination
Once the franchise relationship has ended – either because the term has expired naturally and no renewal has occurred, or because the franchise agreement has ended – it is common for the contract to list a series of steps the franchisee must take to “de-identify” the company’s and franchisee’s association with the franchise system.
13. Right of Pre-emption of the Franchisor
Most franchise agreements give the franchisor the option, but not the obligation, to exercise a first right to purchase the franchisee’s business – in the event the franchisee wishes to transfer the business, or the first right to transfer the assets from the franchisee at the time the franchise agreement expires or is terminated.
14. Relationship between the Parties
Franchisees are always treated as independent contractors of the franchisor. This has a number of important implications. Is an independent contractor not an employee or agent of the client. Instead, the independent contractor does business for itself. The parties to this relationship pay their own taxes, hire themselves, are responsible for their own employees, and generally operate independently of the other in performing the contract between them.
Related: How Franchisees and Franchisors Can Control Their Relationship
15. Indemnity
All franchise agreements contain a covenant of indemnity, which means that the franchisee will indemnify the franchisor for any losses it incurs as a result of the franchisee’s negligence or misconduct. These covenants are almost always unilateral in favor of the franchisor – which is reasonable since the franchisee, not the franchisor, is responsible for the day-to-day operation and maintenance of the business.
16. Non-Competition and Similar Restrictions
A non-competition clause is one that tries to prevent the franchisee from opening a business that would compete with the franchise business. Virtually all franchise agreements will contain non-compete clauses. The covenant is often split into two parts: the “in-term” covenant; and the “post-term” covenant.
As the name suggests, the in-term agreement prevents the franchisee from competing with the franchisor and any other franchisees as long as the franchise agreement is in effect. Typically, this covenant covers a geographic area around each franchise, company-owned, and affiliate company. The post term covenant covers the former franchisee after the franchise agreement expires or is terminated early due to an uncured breach.
Related: The 5 Items in Your Franchise Disclosure Document That Can Make or Break a Real Estate Deal
17. Dispute Resolution
This covenant describes how the franchisor settles disputes with franchisees.
Usually one sees at least a non-binding arbitration requirement followed by a binding arbitration requirement. In other cases, these two ways of resolving are preceded by the requirement that the parties first meet face-to-face.
18. Insurance
All franchise agreements require the franchisee to purchase insurance to cover its business activities. In all cases, each of the franchisee’s insurance policies requires the franchisor to be named as an “additional insured,” meaning that the franchisor enjoys the same coverage as the franchisee, even though the franchisor does not pay for the coverage.
19. Additional or “Miscellaneous” Provisions
This is sort of an all-encompassing section of the franchise agreement that contains what some call “standard” language, meaning it’s “common” for such language to be included in any contract. In virtually all franchise agreements, you’ll see covenants covering mergers, modifications or amendments, non-waiver clauses, state-specific addenda, and more.
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