Franchise contracts can be problematized. Find out what terms and conditions you can desire to find in the contract.
If you’re hoping to be one of the Russia franchise companies, you should make sure you fully understand your franchise contract, which is perhaps the most important document you will sign. Making sure the arrangement is fair, complete, and detailed will help you begin your business off on the right foot.
Franchise Agreement Overview
A franchise agreement is a contract in which a franchisor endows you, the franchisee, a license to work under their trademarks and to conduct trade using their name. The contract allows you to open your business under an established name.
For example, if you want to open a Taco Bell, Taco Bell would be the franchisor while you would be the franchisee operating one location of the chain.
In some ways, a franchise contract is similar to a licensing contract. Both grant the use of a trademark and allow the licensee or franchisee to market products under the name.
However, a franchise goes a step further by giving the franchisee access to business knowledge, training, and a company system. If you open a Taco Bell, you’re opening a franchise. If you acquire with Disney to use an image from Frozen on a t-shirt you’re going to sell, you would use a licensing contract.
Important Elements of a Franchise Agreement
Most of the time, the franchisor provides you with their franchise agreement, which often doesn’t allow for much wiggle room for negotiation. However, you should make sure that the agreement includes the following sections and descriptions:
- Grant of rights. The franchisor gives you the liberty to use their trademarks, service marks, logos, and systems to run your franchise during the term of the agreement. You are not given ownership of these elements, just the right to use them.
- Relationship. The franchisee is always described as an independent contractor and not as an employee of the franchisor.
- Schedule. The contract lays out the timeline for you to open your franchise, including the date by which you must be involved.
- Fees. The arrangement should explain the upfront fees you will be responsible for, as well as royalties you will be needed to pay and expenses, such as promotion, that will be your responsibility. You must have a whole understanding of all expenses. Some franchisors will arrange to installment fees or financing as part of the package. The arrangement may also require you to have a certain amount of capital on hand so the franchisor is certain you can complete the expenses.
- Personal security. Most franchise agreements need you to personally guarantee the financial agreement, in reserve to your corporation is liable.
- Franchise environment. The contract gives you the right to use your franchise within a certain place and should be transparent about the boundaries of that area. You might have shared or exclusive rights to that territory, so are certain you comprehend what you’re being given.
- Length of the agreement. The contract should state how long it is in effect, usually 10 to 20 years. Most franchise contracts include a clause that allows you to renew the contract.
- Ending the agreement. Your contract will say when and how you can terminate your franchise. It will likewise determine how to sell or transfer the franchise and if the franchisor has the first right of refusal for a sale. When the franchise contract finishes, there are usually steps the franchisee is required to do to officially separate themselves from the franchise.
- Insurance. The franchisor will need you to have all important types of insurance to run the franchise.
- Training. The contract will explain the training and sustain the franchisor will provide for you and your workers.
- Quality control. The franchisor normally retains the right to monitor and evaluate your performance and the quality of the goods or assistance you are providing.
- Supplies. The agreement will state where you must obtain the supplies to run the franchise.
- Operation rules. The franchisor will likely have very detailed rules you must follow for operating your franchise, such as the products you can sell, your hours of operation, the software you must use, required store setup, and employee wages, among others.
- Noncompete clause. Your performance might include a non-compete section that will limit other companies in which you can work during or after the term of the franchise agreement. These clauses are contentious and may be unenforceable, relying on where you live.
- Breaches. The agreement will describe what constitutes default, or breach, of the contract and the damages that are applicable in such situations.
- Indemnification. The contract normally requires the franchisee to indemnify the franchisor for failures it suffers due to actions or negligence of the franchisee.
- Applicable law and arbitration. The state law that will be applied to the agreement will be stated. Most franchise agreements require the use of arbitration to settle any disputes.
Forming a franchise can be an exhilarating step in your career.
To be certain you understand and can yield with all the elements of the agreement, you may want to consult a franchise lawyer.
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