What is the purpose of a franchise agreement?


Franchise Agreement

The purpose of a franchise agreement varies according to the perspectives of franchisor or franchisee; a franchise agreement is a determining factor in the franchise relationship that demonstrates the obligations, the rights and relations of both franchisor and franchisee, generally, according to the franchise agreement, the franchisor provides requested training and operational support on a continuous basis to its franchisee including its brand: trademarks, copyrights and know-how, business and operational model so that the franchisee can set up and run a similar business to its franchisor. In exchange of the benefits received by the franchisee, a certain amount of royalty and services fee or/and some share of the income generate will be given to the franchisor according to the franchise agreement.

The franchise agreement is signed at the time an individual makes the decision to enter the franchise system.[i]Demonstrating terms and conditions, duties and obligations to each party, the franchise agreement is a legal contract binding both parties: what need to be performed and what compensation they can expect are outlined in detail in a franchise agreement.

The franchise agreement is a contractual agreement, the franchisee substantially uses its own resource and capitals to invest the business while the franchisor offer continuous support. The purpose of a franchise agreement for franchisee is that the franchisee is allowed to operate under a common trademark, format or procedure, in other words, it determines how the franchisee may use certain of the franchisor´s intellectual property right: depending on if it is a product and trademark/trade name franchising or a full business format franchise, the full one allows the franchisor to use the entire business concept, which includes the name, trademarks, copyright, goodwill, know-how, trade secrets, trade dress and similar intellectual property[ii]; in the other case, the franchisee is only entitled to use the franchisor´s name/trademark/products, for example the motorbike dealers. A franchise agreement should outline all aspects of the franchisor´s intellectual property.

Technical, commercial, confidential information and experience can be a great fortune a franchisee could expect to receive from its franchisor. Therefore, the purposes of a franchises agreement for the franchisor are also to receive legal protection from confidential information leaking, therefore all the clauses and provisions should be included in the franchise agreement.

Advertising polices in a franchise agreement may vary, depends on what types of advertising has been done in the past, what advertising/ marketing initiatives are planned for the near future, how is the money held, if the fund is separated from the franchisor´s account, if the franchisor will provide financial statement pertaining to the funds expenditures to the franchisee, if there is an advisory council, etc..[iii] Keep in mind that term of terminations could be resulted from the breaches of clauses, bankruptcy or insolvency of either franchisor or franchisee.

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[i] The balance

[ii] whichfranchise

[iii] Franchise Specialists