Development of a franchise agreement (commercial concession agreement)

A franchise is a business model in which an individual or group (known as the “franchisee”) is granted the right to use a company’s trademarks, products, services, and business processes in exchange for a fee and ongoing royalties. In other words, a franchisee pays for the right to operate a business using the franchisor’s established brand and business system.

Franchising is a popular business model because it allows individuals to start a business with the support and guidance of an established company.  Some popular franchise industries include fast food restaurants, retail stores, and service businesses such as cleaning or home repair.

Franchisees benefit from the franchisor’s established brand recognition, marketing strategies, and training programs. They also receive ongoing support from the franchisor, such as advertising, product development, and access to a network of other franchisees.

As for the franchisor it includes expansion opportunities without capital investment required, increased revenue providing a steady stream of income from ongoing royalties, brand recognition, motivated owners with a vested interest in the success and reduced risk by transferring day-to-day operations on franchisees.

Franchisors have specific rules and procedures that franchisees are required to follow as part of the franchise agreement. These rules and procedures are designed to ensure consistency in the operation of the franchise and to maintain the integrity of the brand.

What is a franchise agreement?

A franchise agreement is a legal contract between the franchisor and the franchisee that outlines the terms and conditions of the franchise relationship. However, specific franchise agreement types may work better for one situation over another, for example, there are seven types of franchise agreements:

Master franchise agreement – the most common standard type of agreements and most widespread.

Product distribution franchise agreement: franchisor maintains its own production chain for producing products and only sends finished products to franchisees for sale to customers, thus franchisee handles only their distribution.

Job franchise agreement:     a franchise usually takes the form of a business that supplies, sells, or supplies goods or services to final customer, and can be mobile, home-based, or require modest office space.

Conversion franchise agreement: when an established firm may decide to convert to a franchise model or, in other circumstances, a sizable current business (with numerous locations) may decide to do so. It frequently looks to its current managers, supervisors, and star employees to become franchisees.

Investment franchise agreement: also known as a management franchise, is best suited for an investor who wants a less direct, hands-on position in the company, so the franchisee make an investment and hire a crew, the larger-scale company activities including creating a business plan, assigning duties, and marketing may fall under purview of franchisor.

Business format franchise agreement: to its IP, the franchisor also gives the franchisee access to a comprehensive operating system. Under this arrangement, the company expands by giving independent business entrepreneurs access to an existing corporation, including its name and trademark.

Area development agreement:  a contract between a franchisor and an operator, in which the operator is required to run multiple franchise locations independently in a territory and is not permitted to sub-franchise to other parties.

So, depending on your type of IP included, the business format and the area of goods and services you may have different types of franchise agreement needed.

What intellectual property can be included in franchise agreement?

I

Intellectual property that can be included in a franchise agreement typically includes the franchisor’s trademarks, logos, trade dress, service marks, copyrights, patents, business models, commercial secrets, and know-how and any other proprietary information or materials that are associated with the franchise system.

The franchisor may grant the franchisee a license to use these intellectual property rights for the purpose of operating the franchise business, in exchange for payment of fees and royalties.

How to protect intellectual property in development of franchise agreements?

To protect confidential information and IP from disclosing and infringement the franchisor can take the following steps:

Include confidentiality provisions: The franchise agreement should include clear and comprehensive confidentiality provisions that define the scope of confidential information, specify the permitted uses of the information, and set out the obligations of the franchisee to maintain confidentiality and prevent unauthorized disclosure.

Require non-disclosure agreements: The franchise agreement should require the franchisee and its employees to sign a separate non-disclosure agreement, which specifically addresses the confidential information and includes provisions for protecting it.

Limit access to confidential information: The franchisor should limit access to confidential information only to those employees or agents who have a legitimate need to know the information, and should take appropriate measures to secure the information against unauthorized access.

Monitor compliance: The franchisor should monitor the franchisee’s compliance with the confidentiality provisions and take appropriate action in the event of any breach or suspected breach of confidentiality.

Include consequences for breaches: The franchise agreement should include clear consequences for breaches of the confidentiality provisions, such as termination of the franchise agreement, injunctive relief, and damages.

It is important to note that the effectiveness of these measures may depend on the specific circumstances of the franchise relationship and the nature of the confidential information. Therefore, it is advisable to seek legal advice and guidance on how best to protect confidential information in a franchise agreement.

Franchise agreements drafting

The franchise agreement is typically a comprehensive document that covers a wide range of topics, including:

Franchisee and franchisor obligations: The agreement should clearly outline the obligations of both parties, including what the franchisor will provide in terms of training, support, and use of intellectual property, as well as what the franchisee is expected to do in terms of running the business.

Intellectual property: The franchise agreement grants the franchisee the right to use the franchisor’s trademarks, logos, and other intellectual property in exchange for payment of fees and royalties.

Territory: The franchise agreement defines the geographic area in which the franchisee is allowed to operate their business, as well as any restrictions on expansion or competition.

Fees and royalties: The franchise agreement outlines the fees and royalties that the franchisee must pay to the franchisor, including initial franchise fees, ongoing royalties, and marketing fees.

Product and service standards: Franchisees must adhere to the franchisor’s standards for product quality, pricing, and service to ensure a consistent customer experience across all franchise locations.

Operating standards: The franchise agreement sets out the standards that the franchisee must meet when operating the business, including product and service quality, customer service, and marketing strategies.

Training and support: The franchise agreement specifies the training and support that the franchisor will provide to the franchisee, including initial training, ongoing support, and access to marketing and advertising materials.

Renewal and termination: The franchise agreement details the conditions for renewal or termination of the franchise relationship, including any penalties or fees that may be incurred.

Dispute resolution: The agreement should outline how disputes between the franchisor and franchisee will be resolved, such as through arbitration or mediation.

Franchise agreements are usually written by the franchisor and are designed to protect their brand and business system, confidential information and provide full understanding of doing business between franchisor and franchisee.

It is important for both the franchisor and the franchisee to understand their rights and obligations with respect to the use and protection of intellectual property in the franchise agreement, as it is a critical aspect of maintaining the integrity and value of the franchise system.

Development of franchise agreement by a lawyer

A lawyer with experience in franchising can be an invaluable resource in drafting a franchise agreement that meets the needs of both the franchisor and the franchisee:

• can help ensure that the agreement complies with all relevant laws and regulations, including state franchise law, disclosure requirements, and industry standards.
• provide guidance on key elements of the agreement, such as the terms and conditions of the franchise relationship, the rights and obligations of the franchisor and franchisee, and the appropriate fees and payments.
• can help protect the franchisor’s intellectual property rights, including trademarks, trade names, and proprietary systems, and draft provisions for confidentiality and non-compete agreements.
• advise on dispute resolution mechanisms and provide guidance on potential legal issues that may arise during the franchise relationship.

Overall, a lawyer’s expertise in franchise law can help ensure that the franchise agreement is legally sound, meets the needs of both parties, and provides a solid foundation for a successful franchise relationship. Leave a request in the form below to calculate the cost of developing a franchise agreement.