The franchise agreement is a document that lays down the terms and conditions of the franchise and the obligations of the franchiser and franchisee to each other and to the business.
There is no legislation governing franchises so far, and this means the terms set out in the contract are all that the parties have to go by in determining their relationship.
Below are things to look for before signing a franchise contract:
Nature of the contract. The contract begins by describing briefly the nature of the franchise, its trademarks, know-how, copyright, and who owns them. While the franchisee is the legal owner of the business, the franchiser retains control over the way the product or service is presented to the customer and, quite possibly, over the day-to-day procedures in running the business.
Term or duration of the franchise. There is no specific time required to operate a franchise, but it is ordinarily long enough to allow the franchisee to recover his or her initial investment.
There is also usually an option to renew the contract when it expires, but the franchisee is usually expected to agree to the same terms being offered to new franchisees at the time of renewal.
Territorial rights. It is quite common for franchisers to offer exclusive rights to a territory to give the franchisee an incentive to exploit a promising market.
Fees. The franchise agreement sets down how much a franchisee pays for the package—including the management fees or royalties—and what he or she gets in return. The timing of these payments and how the payments are calculated should be stated plainly in the agreement.
Obligations of the parties. This section of the agreement sets down the dos and don’ts governing the relationship between the franchiser and the franchisee. Typically, the franchiser is obliged to train the franchisee’s staff and to provide equipment, manuals, advice and help. On the other hand, the franchisee is obliged to protect the franchiser’s reputation and goodwill, hence the agreement lays down the standards expected of him or her in operating the franchise.
Termination. Though both parties will set out to see the contract through to its full term, circumstances may force either to terminate the agreement. In case the franchisee violates any of the terms of the agreement, the franchiser may terminate the agreement for cause by giving a written notice to the franchisee—usually not less than 30 days before the date of termination—and stating the reason for the termination. If the cause of termination can be remedied, then the franchisee may do so within the 30-day notice and expect the franchiser to withdraw the notice of termination once he or she has done so.
In case either of the parties decides to end the agreement for any reason, the agreement should provide for a refund of the initial investment in whole or in part and to compensate the franchiser for the trouble caused.
This articles was originally published in the July 2005 issue of Entrepreneur Philippines.