Franchisee Basics: The Franchise Agreement

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A Franchise Agreement is a comprehensive and legally binding contract that establishes the terms of the relationship between a franchisor and a franchisee, establishing how the franchisee is to carry out its franchised business in conformity with the established franchise system.

Key Attributes of a Franchise Agreement include:

Grant of Franchise Rights and Term: This section formally grants the franchisee the right to use the franchisor's trademarks, trade name, and business system. It also specifies the length of the agreement, which is typically 5 to 10 years, and outlines the conditions for renewal.
Fees and Payments: This is a critical part of the agreement, detailing the financial obligations of the franchisee. It will clearly state:
- The initial franchise fee (a one-time payment).
- The ongoing royalty fees (usually a percentage of gross sales, paid weekly or monthly).
- Contributions to a national or regional advertising fund.
- Other potential fees, such as for training, technology, or late payments.
Territory: The agreement will define the geographical area in which the franchisee is allowed to operate. It will specify whether the franchisee has an exclusive territory or if the franchisor retains the right to open other franchised or company-owned units in the same area.
Training and Support: This clause outlines the training programs the franchisor will provide, both initially and on an ongoing basis. It also details the support services the franchisee can expect, such as assistance with site selection, marketing, and operations.
Operational Standards: This is where the franchisor's control over the brand is most evident. The agreement mandates that the franchisee must follow the franchisor's established business model and operational procedures. This can include:
- Approved suppliers and vendors.
- Required hours of operation.
- Specific products and services that can be sold.
- Requirements for the store's design, signage, and maintenance.
Intellectual Property: The agreement protects the franchisor's most valuable assets: its trademarks, logos, copyrights, and trade secrets. It grants the franchisee a limited license to use these assets and outlines the rules for their proper use.
Termination and Default: This section specifies the conditions under which either party can terminate the agreement. It outlines the specific events of default (e.g., failure to pay fees, not meeting performance standards) that could lead to the franchisor terminating the franchise.
Dispute Resolution: This clause dictates how legal disputes between the franchisor and franchisee will be handled, often including provisions for mediation or arbitration.
Transfer and Resale: This section explains the process for selling the franchise. Franchisors typically have the right to approve any new franchisee and may have a "right of first refusal" to purchase the business themselves.

In much of Canada, the Franchise Disclosure Document (FDD) is legally required to be provided by the franchisor to a prospective franchisee before they sign a franchise agreement. The FDD is a comprehensive document that contains a sample of the franchise agreement, as well as detailed information on the franchisor's history, financial performance, and other key business aspects. It is designed to provide the prospective franchisee with the information they need to make an informed decision. Before signing a franchise agreement, it is highly recommended that a prospective franchisee have the document reviewed by an experienced franchise lawyer and a financial advisor.span>

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

What is a Franchise?

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