When two businesses forge an alliance in the form of franchising, they need to ensure that the goals and objectives of this business arrangement are achieved. This will require that both the franchisor and franchisee carry out their due roles and responsibilities pertaining to the management and operations of the business. Although both the parties would want the franchise alliance to work and succeed they must also commit to each other of their due performances in running the business and safeguard the business from any unwanted friction between themselves. A simpler way to look at it is as a relationship. In franchising, there are three parties – the franchisor, the franchisee, and the franchise business. The franchise business will work when both the franchisor and franchisee take care of it. To secure the commitment of performance and safeguarding of business interests, franchisors and franchisees bind themselves with a franchise agreement. This answers a common question – is a franchise agreement necessary? In this service program, DFX will develop the franchise agreement keeping in mind the unique business requirements of the franchisors and franchisees.
Key factors to be considered in Franchise Agreement
Another commonly asked question is – how to draft a franchise agreement? There is no easy answer to it. But what can make things easier for both franchisors and franchisees is the awareness of what goes into making a franchise agreement.
- Establishing the intent
Before a full-fledged franchise agreement is drafted, it is important to first establish the intent of both the franchisor and the franchisee to engage in a franchising business arrangement. It expresses that both parties are interested and committed to work things out and establish the franchise business. The document that brings effect to such preliminary commitment is called the Letter of Intent. This is where the broad and general perspectives are brought under the umbrella of common understanding. If there is anything that cannot be resolved at this stage, it saves time and effort for both parties to take the matter any further. Even the Letter of Intent may have to be revisited multiple times to reach the common grounds. But because here the principle-based or broad issues are covered, it is easier for both parties to give a direction to the potential alliance. Although the Letter of Intent comes before the final franchise agreement it marks the beginning of paperwork formalities.
- Sharing of intellectual property
Intellectual property includes the brand name, copyrights, patents, technical know-how, etc. Both the franchisor and franchisee can possess intellectual property. Because of its reserved nature, companies are and must always be cautious when their business comes close to revealing or sharing any of their intellectual property. In franchising, there may arise a working requirement where the intellectual property has to be shared with one another. In such cases, businesses must carefully assess and optimize the requirement of sharing while putting in place adequate measures to safeguard their intellectual property. These aspects are addressed in the franchise legal agreement wherein the terms and conditions of using the intellectual property rights of the other party are laid down in clear and unambiguous terms.
- Safeguarding against misconduct
The bitter truth is once misconduct takes place in a franchise business, there is no way for the other party, whether it is the franchisor or the franchisee, to tell if it was done deliberately, mistakenly, or because of poor effort. The end result is that the business takes the beating. Thus, for the sake of business interest, both the franchisor and franchisee must safeguard themselves from misconduct caused by the other party, willingly or unwillingly. This objective can be secured with relevant clauses in the franchise agreement. In the event of any misconduct, the responsibilities can be squared out and pre-decided action may be initiated.
- Clarity of doing business
A franchise business will work on its intended lines when both the franchisor and franchisee work as they had planned to. If this planning is vague, there is bound to be confusion and misunderstandings despite the best of intentions on both sides. Every broad matter or fine detail of carrying out the business must be defined in clear and unambiguous terms. Whether it is about the schedule of investments to be made and project deadlines or a matter of daily reporting and format of reporting, nothing should be left to assumptions. Another reason to be particular about the standards of performance is that the roles and responsibilities are going to be carried out by the operations executives. Even if the CEOs might have agreed on how the execution must take place; the employees of both the organizations must also know and be provided with the guidelines and resources to be able to do so. A franchise agreement may not cover the operational details but it can secure the commitment of both the franchisor and franchisee in ensuring that the agreed SOPs (Standard Operating Procedures) will be followed. However, the broad and significant matters must find a place in the franchise agreement with utmost clarity and precision.
- Commitment to non-disclosure
The importance of business data and tons of other working information needs no separate highlight. Not to disclose business data and information of a company you are working with to outsiders or insiders who should have no concern for such information is considered one of the fine standards of professionalism. In franchising, two businesses and their employees have to work on data and information that are vital for one another. It is the professional responsibility of both parties to ensure the privacy of such data and information. As an instance, unfortunate, but sometimes the delivery executives of some eCommerce companies ask for phone numbers of customers at the time of order delivery. There is absolutely no need for them to be doing that because they can call the customer over their app (the call gets redirected and the customer’s phone number is not displayed to the delivery executive).
- Exit and termination
Well, not every franchising deal works out as intended. We hear only the success stories. The good part is that it can be done without making things uglier. Here, we are talking about exiting or terminating a franchise agreement. There could be so many reasons for both the franchisor and the franchisee that the franchise business may not work out as either or both have planned. As long as the reason is satisfactory and prudent to common sense, both parties can plan a way to terminate the franchise on certain pre-agreed terms and conditions in the event of such a need ever arising. The franchise agreement can also cover the conditions under which either or both parties can invoke the termination. The purpose of such planning is to make the exit easier for both parties. Even if there are complications in executing the planned exit process, the franchise agreement can also mention the jurisdiction under which the case would be tried for a resolution.
Why DFX to develop the Franchise Agreement?
With 8+ years of service in the field of franchising consulting, DFX (Digital Finance Experts) helps franchisors and franchisees establish a robust foundation of their franchise business across verticals. Our expert franchising business consultants carry out the necessary financial assessments and projections required to validate the franchise expansion strategy with a comprehensive franchise business plan. Our team works towards ensuring that the necessary financial considerations find their due place and recognition in the franchise agreement and are not compromised by other conditions. In simple words, our team of franchise business consultants will work towards ensuring that your financial priorities in the franchise business remain integrated into the franchise agreement.
Franchise businesses are made bound by legal contracts and agreements. It outlines the working arrangement, responsibilities and many other important features like division of management, operational control, duration and timelines, exit routes, profit and revenue sharing, reporting, audits, training support, asset-sharing, privacy and confidentiality, dispute management, etc. This module will shed light on this critical aspect of franchising.
20 - 35 days.
Step 01 - Request for Quote
Step 02 - Service Quote Finalization along with SLA (Service Level Agreement)
Step 03 - DFX Experts start working on your business
Always humans, never bots.