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Franchise Agreement Provisions

Other provisions in the franchise agreement include:

  • Sign requirements. This is generally outlined in the franchise agreement in the proprietary market section: what your use of the sign must be, may be and may not be.
  • Training and advisory assistance. There's usually a section that outlines what training and assistance you're going to get. The agreement will indicate that you must complete a training program and that the company must give you assistance in starting out and in training you. Franchisors will indicate that they'll provide you with an ongoing advisory service and promotional materials, bulletins and marketing development products and techniques.
  • Advertising. Generally, franchisors will want to approve all advertising copy and packaging and promotional materials that you use to ensure that they're consistent with the concept. Companies may establish a national advertising fund to which you'll have to contribute and of which you'll be a beneficiary during any national advertising campaigns. They may require you to spend a certain amount of your gross income on local advertising.
  • Operating manual. Franchisors will require that you follow the operating manual, that it be kept confidential, that it's a property of the franchisor, and that you must adopt revisions to the manual, which will be made by the franchisor on an ongoing basis. Companies are very concerned about this operating manual because it tells everything about their businesses.
  • Maintenance and repairs. The franchisor will want you to maintain the interior and exterior of your location. They want the ability to force you to repair your unit in five or 10 years so that you don't allow it to get run down. In some cases, there are franchisor provisions that require the franchise to construct additional buildings if the franchisor feels they're necessary in order to accommodate the business. Generally, these provisions have not been accepted very well by most states.
  • Accounting and records provisions. These provisions will require you to keep certain records including weekly sales reports, semimonthly sales reports and monthly profit and loss sales reports. Franchisors will want to be able to inspect your records through their area supervisors or representatives to ascertain that you're correctly reporting the activity of your business, making sure you're not understating your sales to cheat them out of royalties. There will also be a section requiring you to give them annual, audited statements by a certified public accountant.
  • Standards and quality. These provisions will establish uniformity, and will provide for purchases, which conform to the franchisor's specifications. These sections are in some cases quite extensive.
  • Quality control provisions. The more labor-intensive your operation, the more franchisors will insist on certain procedures. If you're handling a franchise which simply dispenses a pre-made product, there isn't as great a concern on the part of the franchisor, but in cases where a product is labor-intensive and made on the premises, whether it be food or manufactured items, the quality-control provisions will generally be very substantial. This is for your benefit as a franchisee as much as it is for the franchisor's.
  • System modifications. Specifically, this section will establish the right of the franchisor to modify the concept, but it will also prohibit you as a franchisee from any unauthorized modification of that system. In other words, franchisors want the system to be uniform and don't want you to change anything without their approval. When they want a change, they want the power to say you must change the procedure.
  • Continuing services and royalty fee. These provisions establish that you'll be paying a royalty--an ongoing percentage of sales, or a fixed monthly or annual amount which will be remunerated to the franchisor for the continued use of the franchised concept. The franchisor will determine what kind of program is necessary, as well as what kind of support will be provided on an ongoing basis. The direct and indirect costs associated with those services are projected, and a percentage is established to cover those expenses. The method in which the franchisor collects and assesses these fees is provided for in the franchise agreement.
  • Insurance provisions. The franchisor knows what kind of insurance and liability protection you need, as well as what kind of protection they need. The agreement will generally establish what amounts will be required for protection including workman's compensation, general liability, product liability, bodily injury and property damage.
  • The terms. How long will your franchise agreement be in effect, and what are the options beyond that period of time? The term clauses are generally coordinated with the lease so that if you have a lease for 15 years, you'll have a 15-year franchise agreement. A long-term agreement assures the franchisor that it will receive a royalty for a longer period of time, and it gives the franchisee more security. A shorter term gives the franchisor the ability to adjust the royalty upward more quickly, and it eliminates undesirable franchisees. When their term expires, they're simply not renewed.

For a franchisee, the short term can also be an advantage. With the short term, you can get out of the agreement and not pay a royalty. On the other hand, you may want to hold the franchisor to the agreement for a longer period of time. This is something you'll have to assess according to your interest in working with that particular franchisor.

  • Covenant sections. These restrict a franchisee from copying or diverting business, hiring employees or divulging secrets. These restrictive covenants are subject to state or antitrust laws. Some states won't allow restrictive covenant sections while others will. Some antitrust laws prohibit certain restrictions of a person's ability to earn a living. Franchisors will indicate that you as a franchisee cannot simply open an identical business, using all the franchisor's systems and know-how and marketing tools and so on, without using the franchise name and paying a royalty.
  • Termination and defaults. This section provides the terms under which the franchisor is able to terminate you or to say you're in default. If you become bankrupt, for example, that is usually a condition allowing for termination of the franchise agreement. If the franchisor gives you notice to cure a certain defect, you'll have a limited amount of time to comply.

Both parties have certain rights and duties on expiration or termination, and they'll be spelled out in a special section of your franchise agreement. Usually it will provide that on expiration or termination you must pay all the sums you owe the franchisor, cease using their name and, in some cases, give the franchisor the right to purchase the physical assets. There's often a provision that deals with the operation of the franchise upon the event of disability or death. The franchisor then has the right to operate the business.

  • Taxes and permits. This clause will require the payment of any tax assessments, liens, equipment or previous accounts, and that you be in full compliance with all federal, state and local laws. This protects the franchisor as well as you. It will require that you obtain all permits, certificates and licenses necessary to do business at that particular location. The agreement will provide that you're an independent contractor; that you're not an agent, partner or employee of the franchisor; that you can't incur any liability for the franchisor; and that you bear the cost of defense of any claims. Generally this section clarifies that any debts you incur are your own and not the franchisor's.
  • Nonwaiver provision. This says that if the franchisor doesn't enforce a certain clause in the franchise, that doesn't mean it isn't enforceable at a later date. There's usually a similar provision on the receipt of payments. If franchisors don't accept a payment from you, that doesn't mean they don't have the right to come back and collect it later. There's also a notice provision that dictates the manner of notice, how much notice they have to give you, how it should be served, to whom and where. Provisions for liability for breach, which involves payment or costs for attorneys' fees by the party in default, are also sometimes put into an agreement.
  • Arbitration clauses. Some states won't allow them and won't recognize them, but they do provide a basis for settling disputes without having to go to litigation. They sometimes provide for binding arbitration. Both the franchisor and franchisee provide an arbitrator, then these two pick a third arbitrator. The third arbitrator may do the arbitration, or all three of them might. They listen to the issues, the company's side and your side. With binding arbitration, whatever the arbitrators decide will dictate the final agreement.
  • "Franchisee" definition. This definition will include not only you, but also any successors. There will be a caveat, which is a disclaimer, to any claims made. It indicates that you agree you're assuming certain risks, that the success of the business isn't guaranteed, and that the success of this business depends on your ability at a franchisee.

This covers the basic considerations that you'll find in most franchise agreements. Again, we can't stress enough that you should have an attorney examine all documents closely. Most franchises are very capital-intensive, and you want to protect yourself as much as you can.

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