8 Common Contract Obligations In Your Franchise Agreement

A franchise agreement is the legal contract between the franchisor and franchisee that outlines the rights and obligations of both parties and, in general, forms the legal basis for the franchise relationship. While franchise disclosure documents (FDD) are governed by the FTC and provide a set amount of information, there is no such thing as a ‘standard’ franchise agreement, as the franchise legal obligations and terms will vary from franchise to franchise.

You should always read through your franchise agreement thoroughly and even enlist legal assistance to ensure you fully understand the franchise obligations you are taking on. With that in mind, here we’ll take a closer look at what kind of franchise obligations are often included in a franchise agreement, so you know what to be looking out for.

8 Common Contractual Franchise Obligations in Franchise Agreements

1. Franchise Fees

These are among the franchise obligations that should definitely appear in your franchise agreement. It is vital to know from the outset what financial obligations you will have as a franchisee both at the start (the initial franchise fee, territory fee and startup package), ongoing throughout the term of the franchise (royalty fees, marketing contributions), and final fees (renewal cost or sale fee).

Understanding your franchise obligations in terms of fees has a big impact on your financial planning and even on whether or not you will be able to get the finance to start the business in the first place. It’s also important to recognize the differences in the fees. For example, one franchise might have high upfront fees, but lower ongoing royalties, meaning you see more money as the business grows compared to one with a low initial fee but taking more out of your revenues as time goes on.

2. Products and Services

This can vary depending on your franchise type, but the vast majority of franchise systems will require you to stay in strict adherence to the product and service offerings of the whole system. This cohesiveness makes it easier to market every franchise over a huge area (for example, a national ad campaign about a new Subway sub requires all the franchises to be selling it) and also means that the franchisor can get a better deal from suppliers, which can then be passed on to the individual operations. The franchise’s name and reputation are also at risk if each franchise was to start making its own product decisions which may not work out, so from the point of view of the whole system, franchise obligations about sticking to a set offering are usually standard.

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3. Marketing

As mentioned above, marketing in a franchise system is commonly handled collectively, meaning that one of the franchise obligations in your franchise agreement will be about how much each franchise’s contribution will be. This can change from year-to-year or be dependent on revenue so that the most successful franchise operations contribute the most. Collective marketing is one of the major advantages of franchising as it can give you instant national recognition even if, to yourself, at least, you are running a small local business.

4. Maintaining Standards

Another common franchise obligation is how the business is run and presented. A franchise system can spend a lot of time building a high-quality reputation, and so as part of your agreement to become part of that system, you must uphold those standards. This is particularly relevant in the service industry, such as restaurants or cafes, where customers have come to expect that each franchise will have the same feel and comfort no matter where they are in the country or even the world. Your customer-facing operations must fit with the agreed franchise style, right the way down to decor, uniforms and stationery.

5. Territorial Exclusivity

This is one of the franchise obligations that goes both ways. In the franchise agreement, the franchisor will agree that no one else will be allowed to open one of their franchises within a certain area, which could be as large as a state or as small as from one end of a street to another. However, it also means that a franchisee, such as those in a mobile business, can’t stray outside of their own territory while hunting for work. With each business technically in competition with each other, rather than being part of a big chain, the wording and meaning behind this territorial exclusivity is a key part of business success and avoiding market saturation.

6. Franchisor Obligations

As we’ve seen, franchise obligations are not just about what the franchisors require but also what the franchisee is due. This includes access to the systems and operations manuals of the franchise, so they know how to run the business to the standard expected, as well as giving them access to the franchise suppliers to ease that operational aspect of the business. Franchisor support is another important obligation which may include a 7-day helpline or field support which can visit an operation to see where they might need help.

However, possibly the most important of the franchise obligations from the franchisor’s end is allowing the use of trademarks and branding by the franchisee. This is an important legal understanding that secures the franchisee’s business model and for which they are paying their franchise fee and royalties.

7. Keeping Accurate Financial Records

While good bookkeeping is always sound business practice, it may also be among the franchise obligations you sign up for in your franchise agreement. For example, the franchisor may mandate that all accounts are sent yearly to their offices or that the franchise operation must submit to an audit every two or three years. There are a number of reasons for this. In some situations, royalty payments will be based on a percentage of sales, so it will be important for the franchisor to be assured that these figures are accurate. It can also expose the franchise to reputational risk if an individual franchise has been financially mismanaged, creating issues with suppliers and generally being in the news for the wrong reasons.

8. Obligations Upon Termination

The final franchise obligations that will be contained in a business contract will be about what happens if you are no longer in a business relationship. This can happen if the franchise term runs out or one side or the other seeks to end the contract before its time. The terms of these particular obligations will cover matters such as the removal of branding, the return of stock and the discontinuation of the use of trademarks.

Conclusion

Like any business relationship, the cooperation between the franchisor and franchisee is underpinned by a contract known as a franchise agreement. This franchise agreement sets out a number of franchise obligations, both from the franchisee and the franchisor. For the franchisee, these include the fees due over the contract’s lifetime, the goods and services that must be offered, and how the business should be run in some key aspects. For the franchisor they must agree to provide the use of trademarks, offering support and territorial exclusivity.

At Screenmobile, we’re proud of having one of the best renewal rates in the country in any field at 99.5%. A big part of this is how transparent we are transparent with our franchisees and then working with them so they can achieve success. We believe a good franchise agreement that works for all parties is the foundation for a lucrative and successful partnership. So, if you’re interested in opening a franchise business with a track record of success in a booming industry, then why not get in contact with our team today.