What is a Franchise Agreement?

A franchise agreement is the master legal document that sets forth the rights and obligations of the two main parties to a franchise: franchisor and franchisee.

In legal terms a franchise agreement is a license from the franchisor to the franchisee. A license simply means one party gives permission to another party to do something or use something of value. In the case of franchising agreements, this means:

• The franchisor licenses to the franchisee the right to use the franchisor’s intellectual property, systems and brand.
• The franchisee acquires the rights to open a business using the franchisor’s intellectual property, systems and brand, provided it meets certain conditions.

Although the definition of franchise agreement is simple enough, the documentation can be complex.

A typical franchise agreement is 25 to 30 pages long. After attaching all exhibits and addenda, the final agreement can be two or three times as long.

What Start-Up Franchisor’s Need to Know About the Franchise Agreement

As a franchisor your franchise agreement will serve as the primary and most important legal document that will govern and define the legal relationship with your franchisees. Within your franchise agreement you will be granting your franchisees the legal right to establish and develop their franchised locations and, in turn, the franchisees will be undertaking the obligation to establish and maintain their franchised operations in accordance with the mandates of your system and to pay to you certain on-going fees.

Franchise Agreements Are Negotiable

An issue that comes up extremely often relates to whether or not franchise agreements are negotiable. The answer is that they are negotiable provided that the negotiated changes are based on a request of the franchisee and to provide the franchisee with more favorable terms and rights but not less favorable terms or rights. While franchise agreements are typically negotiated and are frequently modified, the modifications are most commonly of a limited nature as franchisors do and must insist on uniformity within its franchise systems. Franchisors should never negotiate or modify structural items like initial franchise fees and royalty obligations.