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What Is a Franchise Legal Agreement?

Why it's important and how to create one.
IMAGE Unsplash / Romain Dancre
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Do you know that one of the primary movers or triggers of any successful business is the legal aspect? Without proper legal works, a business won’t even be able to start any legitimate transaction. 

In terms of franchising, one of the most important legal documents is the franchise legal agreement. This document legally forges the relationship between a franchisor and a franchisee. Without it, a lot of business-related threats, mishaps, and breaches could be committed both intentionally and inadvertently by all parties involved.

What is a franchise legal agreement

The franchise agreement is what defines and details the franchise relationship. It specifies in particular the obligations and responsibilities of the franchisee to the franchisor and vice versa.

Who’s in-charge of writing it?

The franchisor is basically the one who drafts the document. However, the franchisee is also allowed to review it before any signing happens. In the process of review, the franchisee must carefully read and understand all the contents of the agreement and consult a trusted legal counsel for advice and peace of mind.

If ever some revisions are needed to be done, the franchisee must inform the franchisor for approval. It is only when both parties agree to all the clauses can a signing happen that will make the partnership official.

How long does it usually take to write a franchise agreement?

There are two stages in producing a franchise agreement: the pre-work and the actual writing process. The pre-work consists of determining the fees and developing the contract details such as term, renewal, transfer of ownership, etc. All these data should be equitable and must result in a win-win situation for both parties.

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For franchisors, it won’t do any good for their business if the data and numbers in their franchise agreement are not well thought out. Even if other businesses have three percent royalties, it doesn’t mean that they should impose a royalty fee of two percent or less just to set their brand apart and make it more marketable. Franchisors should think that these percentages and fees should efficiently cover expenses and services such as opening support, store visits, employee salary, etc.

Meanwhile, the writing process usually takes around or less than a month until every detail is verified by lawyers and the agreement is finally signed. While franchisors can draft their own legal agreement with their legal counsel, it would be better to talk to franchise experts and consultants as they are the ones who specialize on this matter.

What should franchise agreements contain?

Some of the salient provisions you will see in the franchise legal agreement are:

- Terms of the franchise

- Payments of the franchise fees and purchases

- Location of the franchise unit and how many population it will serve

- Standards of performance of the franchisee

- Obligation of each party among others

- Exit plan of the franchisee if s/he should ever need to

Different types of businesses may add more contents depending on the nature and needs of their business.

Prior to signing the agreement, franchisees are encouraged to conduct due diligence on the franchisor and prepare a business plan. Ultimately, the franchisee will be investing hundreds of thousands, if not millions, of hard-earned money into the franchise so it is worth doing those tasks before signing the agreement and getting into the franchise relationship. 

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Fees and payments

In terms of the fees and payment terms included in the document, franchisees should note that any fees paid to the franchisor before and after signing the franchise agreement, in most cases, are non-refundable. Thus, a thorough study of the franchise agreement, the viability of the business, and his/her own due diligence should be done.

Also, franchisees may want to check the damages or penalties and fees to be paid to the franchisor in case of commission or omission of certain obligations such as confidentiality,  pre-termination, and non-compliance to the operations manual and any supplementary services.  Essentially, the operations manual is considered a legal document because a lot of provisions in the franchise agreement refer to the operations manual, making it like an attachment to the franchise agreement. 

For franchisees, it is strongly advised that all parts and details of the agreement must be read, understood, and reviewed before signing. For franchisors, all possible scenarios must be contained and covered by the agreement. Overall, the details of the document should make sense for both parties.

Just like a marriage, a franchise relationship between a franchisor and a franchisee works out great if both parties are satisfied and happy. And an effective way to ensure this is to draft, finalize, and settle with a franchise legal agreement that is both fair and firm.

Get to know more about how to franchise your business. Francorp Philippines holds regular webinars via Zoom for FREE. To see the upcoming schedules, visit https://www.francorp.com.ph/franchise-your-business-webinar. If you want to know if your business is franchisable, please contact our franchise analysts at (+632) 8638.31.42 / 0917.835.55.30 or email [email protected].

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Sam Christopher Lim is the CEO of Francorp Philippines; President of U-Franchise Sales & Management; Chairman for ASEAN Integration of the Philippines Franchise Association; and Co-author of the book “12 Strategies of Franchising."

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