Understanding Franchise Agreements

Franchise agreement is a legal contract that binds the franchisee with that of the franchisor. Franchise agreement contains certain important clauses that determine the relationship and interdependence of franchisee and franchisor.

To understand the franchise agreement is equivalent to understand a particular franchise. The agreement lists obligations of the franchisor and the franchisee to which both agree. Some important provisions of the franchise agreement are:

Franchise Fee and Royalty
Franchise fee is the upfront fee that franchisee has to pay to buy the franchise unit. Royalty is the monthly fee that is to be paid by the franchisee to franchisor.

Project Cost/Investments
It is the cost of the project or investment required to establish a business unit. Franchisee must have this amount available to start the business.

Franchisor Support
Franchise support comprises of the services and apparatus provided by the franchisor to franchisee.

Territory Assigned
It is the regional territory in which the franchisee has the exclusive rights to operate the business. The franchisor cannot assign the same territorial unit two or more franchisees.

Duration or License Period
It is the period for which the franchisee can avail the benefits of the franchisor and operate the business as per franchisors norms.

Trademark and Patent Rights
Under trademark rights and patent rights is mentioned the way these are to be used by the franchisee. Trademark rights and Patent rights belong to the franchisor.

The franchisor usually provides a manual called operations manual that describes how the business is to be operated. It is important for the franchisee to have this manual to avoid conflicts with the franchisor.

Franchise Renewal/ Cancellation/Termination
In this section are listed the terms of renewal of the franchise agreement, agreement cancellation and termination of franchise agreement.


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