What To Remember When Drafting Contracts For Your Franchise

Companies have many ways to expand. They may opt to increase their physical stores, or they may choose to introduce their brand internationally. When it comes to brand expansion, franchising often comes to mind. It is a billion-dollar industry that has helped various businesses increase their brand reach and tap a broader target market.

Opening your business up for franchising allows your brand to tap into more areas and to gain a more prominent brand reputation. However, successful franchises require hard work, communication, and a precise business model. To achieve this, every detail and condition of a franchise must be in a legal contract.

What is a Franchise?

When people are asked what franchising is all about, they quickly think of McDonald's, Burger King, and KFC as examples. They are not aware that franchising is more than just store expansion or uniformity.

When a business opens up for a franchise, it grants another party, the franchisee, the rights to the franchiser’s trade name or trademark. The franchisee can use the brand name to produce as well as market the products or services of the franchiser.

Benefits of a Franchise

In a franchising agreement, the franchisor and franchisee must benefit. Both parties should earn profits and reap the rewards of the franchise. Otherwise, the franchise’s business model is not working.

Some of the benefits of entering a franchising agreement include:

• Independence. Franchises provide freedom for small businesses but with the benefits of having a network of large companies. You are not constricted with barriers of entry including startup costs, brand identity, and customer loyalty.
• Higher success rate. Franchises reduce business risks and increase its earning potential. You already have an existing business plan, target market, and a known brand. Franchisees can operate better because they are already applying an efficient business system.
• Profit increase. Entering into a franchise is a great way to augment your profits. Franchisers can increase their source of income through royalty and franchising fees. Franchisers sell an established formula for business success for a substantial price. Franchisees can also achieve profit increase because it adapts a proven and working business model.
• Lower costs. If you are looking for a way to set up a new store, but you have limited funds, you can open your business for franchising. Your franchisee shoulders the cost to construct another physical store. Other costs such as equipment acquisition, real estate taxes, supplies, working capital, payroll taxes, and employee wages are also shouldered by the franchisee.
• Increase in market share. Getting a franchise gives you an edge over your competitors. Most franchisers already have a substantial market share. Franchisees can utilize that market share and make use of it to increase revenues.

Tips on Drafting Franchise Contracts

Franchises must have a legal contract before any agreement becomes binding. A written contract is needed to avoid and solve any misunderstandings or disputes. It is crucial to draft a precise and detailed contract to keep the franchiser and franchisee’s business relationship binding.

You can consider these tips when drafting contracts for your franchise:

• Identify the parties. A franchise agreement usually involves two parties – the franchiser and the franchisee. It may be between two businesses or between a company and an individual. Identify the enterprises engaged in the contract. Also, indicate the nature of the business and address.
• Define the terms. Include a definition of terms in a part of the agreement. This portion is essential to both parties can understand what terms are indicated in the contract.
• Grant of license. This part of the contract specifies that the franchiser allows the franchisee to use the right to the former’s business name. Indicate that the license is non-exclusive, as you want to sell various rights or licenses to different parties.
• Location. It is also essential to include the area of the new store. Franchisers should also indicate that franchisees must only operate on their designated site. There should also be a timetable as to when the location must be finalized, finished and opened.
• Trademark use. Indicate that franchisees are only allowed to use them for the purpose of the franchise. However, the contract must state that franchisee still owns the trademark. Therefore, any alterations and revisions must be upon the approval of the franchiser.
• Specify dates. Dates are important in contracts, especially franchise agreements. It should include the following:
• Effectivity date. This sets when the franchising contract commences.
• Duration. Duration of the franchise may depend on both parties. There must be a minimum number of years. The franchise duration may last for more than five years, depending on what the parties stipulated.
• Deadlines. Construction deadlines must be stipulated. It is also important to include renewal deadlines when the contract has already ended.
• Contract Renewals. The date of contract renewal must also be stated. The terms of renewal should also be specified.
• Other related information. The contract must also include other information such as:
  • Facility standards. The agreement must indicate how the franchise facility or new store should be. It must adhere to the franchiser’s standards.
  • Hiring process. It also needs to include how the workforce must be hired. It must also include how the people should be trained, paid, and assigned.
  • Non-compete and confidentiality clause. There must be a guarantee from the franchisee that everything in the agreement is confidential. Any information must be used for the franchise and not for anything else.

Ensure that the contract has all the necessary details you need. Both parties must understand every part of the agreement to avoid any problems during the commencement of the franchise. You may click here if you want to know more information about the intricacies of contract drafting, especially from a legal perspective.

Cindy Dowling

Cindy Dowling, part time writer who offers a fresh take on various law topics with the pieces she writes for local firms. Cindy enjoys a good cup of coffee and a good book whenever she has the time.

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