How To Create and Manage Franchise Agreements

If you own a franchise and you want to license a business owner to run a business using your trademarks, you need to set up a franchise agreement. A franchise agreement is a legally binding document between a franchisor, who owns a brand’s trade name, trademarks, and business systems, and a franchisee, who is given the legal right to create a business associated with the franchisor’s brand. As the franchisor, you will receive royalties and sometimes an initial fee for granting the franchisee the right to do business under your brand. You will also have the right to control how the franchisee will use your brand.

Read on to learn more about franchise agreements and how to create one. By the end of this article, you’ll also learn how to use contract management tools like Ironclad to draft and manage franchise agreements.

What is a franchise agreement?

The purposes of a franchise agreement are to:

  • Protect your intellectual property (IP) rights as a franchisor.
  • Establish consistent standards for how franchisees operate under your brand.

You’re most likely to encounter franchise agreements in the service, retail, and restaurant industries. Here are some businesses that are likely to go for franchise agreements:

  • Cleaning and maintenance
  • Convenience stores
  • Education (i.e., tutoring centers)
  • Fast food chains
  • Retail
  • Senior care
  • Shipping services (i.e., UPS)

Franchise agreements are necessary when you want to create a franchise relationship with a franchisee and regulate how they use your brand. A franchise agreement contains detailed information about how the franchisee can use your trademark, how their employees should dress, what business systems the franchisee should use, and more.

Although you have the right to tell franchisees what to do as a franchisor, there are some things you can’t regulate with franchise agreements. Since franchise agreements aren’t employment agreements, you can only control brand standards. As an independent contractor, the franchisee retains control over all other aspects of their business.

If you’re in the United States, your franchise agreement must meet the following Federal Trade Commission (FTC) requirements to be valid:

  • The franchisee’s business is substantially associated with your brand.
  • You control or substantially regulate how the franchisee uses your brand to conduct business.
  • You receive a fee from the franchisee in exchange for giving them the right to operate their business using your trademarks. This fee can be an initial fee of at least $500 or a continuing fee.

You may have to follow other rules depending on what state you’re in. Several states have passed laws that define a franchise differently from how the FTC defines franchises.

How to create a franchise agreement

Franchise agreements typically include the following:

  • The names of the parties: List out the full legal names of the parties to the franchise agreement. The names must match the parties’ official ID cards (i.e., Articles of Incorporation for companies and passports for individuals).
  • Use of IP: Establish your ownership of the brand IP and list out all of the IP you’re granting to the franchisee, such as manuals, trademarks, patents, and trade secrets.
  • The grant of franchise rights: Grant the franchisee the right to create and operate a franchised branch or outlet. Be as detailed as possible and include the following:
    • How and when the franchisee can use your trademarks
    • What kind of business systems the franchisee needs to implement
    • What kind of dress code the franchisee needs to adopt
  • The length of the franchise term: Write down how many years you will grant franchise rights to your franchisee. Franchisors usually grant franchise rights for 10 years at a time, but the term can vary depending on your industry and other factors.
  • Franchisee’s development obligations: Talk about the franchisee’s obligation to meet certain goals within a designated period. Typically, franchise agreements require franchisees to establish a franchised outlet or outlets and commence day-to-day business within a certain amount of time.
  • Training: Show what kind of training you’ll provide the franchisee before and after opening. This generally includes pre-opening and continuing training, headquarters support, quality control, and supply chain training.
  • Operating procedures: Mandate the franchisee to follow your business systems and procedures. You also need to establish what products and services the franchisee can and cannot sell.
  • Renovations and Design:Tell the franchisee how they must renovate and design their premises. You can require the franchisee to use specific suppliers, colors, and logo placements.
  • Insurance requirements: Establish how franchisees are solely responsible for maintaining and obtaining the insurance policies for their business.
  • Territorial rights: Define when the franchisee can operate the franchised business and who the franchisee may or may not sell services or products to.
  • Initial fees and continuing fees: List out all of the fees that the franchisee will pay you. Franchisees typically pay initial and continuing fees to franchisors for the right to continue running a franchised business. You should also define whether the franchisee is required to pay marketing fees such as brand development funds.
  • The right to audit franchisee records: Define the records you want your franchisee to maintain. You should also list out the software they’re allowed to use and your rights to access and audit their records for quality control and brand management.
  • Restrictive covenants: Restrictive covenants limit competition. In-term restrictive covenants prevent the franchisee from operating, establishing, or participating in any competing business during the course of the franchise agreement. Post-termination covenants will prevent the franchisee from operating, establishing, or participating in competing businesses for a designated period after the termination of the franchise agreement.
  • Indemnification: Indemnification is one of the most important clauses in your franchise agreement because it states how the franchisee will pay you in case they do something that causes damage to your brand. This includes negligence as well as wrongdoing. For example, let’s say that your franchisee keeps on serving spoiled food at their outlet, causing sick customers to write one-star reviews for your brand. Since you’ve suffered reputational damage due to the franchisee’s negligence, they need to reimburse you for these losses.
  • Termination: Like all other agreements, your franchise agreement needs to have a termination clause that establishes how the parties can end their relationship. Include the following:
    • Notice period
    • Procedures that need to be followed
    • Whether there are damages for early termination and how these damages will be handled.

Please be sure to consult a lawyer or legal professional when creating your legal agreements.

Managing franchise agreements

With so many clauses to look out for, developing a valid franchise agreement is easier said than done. Managing franchise agreements can be even more trying, particularly if you’re still storing agreements in hard drives, USBs, and physical cabinets. 

That’s why you should get top-notch digital contract management software like Ironclad Editor. Unlike analog contract management tools, Ironclad has powerful tools that make creating and managing franchise agreements easier than ever. Our Data Repository, for instance, lets you store all of your franchise agreements in one place. With all of your contracts in a searchable cloud, you’ll be able to:

  • Answer questions about approaching deadlines and obligations faster than ever. 
  • Locate the contract you’re looking for and see what it contains in just a few seconds.

Data Repository also allows you to add people from other departments—such as Human Resources and Procurement—to your contract hub. This will:

  • Break down your organization’s contract silos and allow more transparency into the contracting process. 
  • Make it easier for Legal to answer team members’ questions about upcoming deadlines and obligations.
  • Make it easier for Legal to write, manage, execute, and organize franchise agreements that interest more than one department.

Additionally, Ironclad comes with Workflow Designer, a self-serve tool that works straight out of the box. Unlike many other platforms’ template creation tools, our Workflow Designer doesn’t require technical expertise or long implementation times. Users can use its simple drag-and-drop interface to create and launch franchise agreements and approval processes within minutes. They just have to upload a template, tag fields, and add signers and approvers. All of our templates are up-to-date and have built-in approval routing and guardrails to ensure that your franchise agreements are 100% compliant.

Wrapping up

A franchise agreement is a legal document that grants a franchisee the right to operate a business associated with your brand. It also gives you the right to control how the franchisee will use your brand IP to run their business.

Creating and managing franchise agreements can be tough, especially if you’re a busy in-house counsel. To keep track of deadlines and answer contract questions within minutes, consider getting Ironclad Editor. User-friendly and armed with state-of-the-art tools, Ironclad will transform the way you work with contracts. Our Data Repository allows you to bring in contracts from all over, break down contract silos, and find answers to questions within minutes. What’s more, our Workflow Designer empowers you to create franchise agreements with just a few clicks of your mouse. 

Interested in experiencing the Ironclad difference? Try our sandbox demo today.

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