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Understanding the Franchise Agreement

Completing and agreeing to the franchise agreement is one of the most vital processes of the whole franchising journey. This guide will cover some of the key elements of the agreement, so that you can make a more informed decision.

the franchise agreement

Defining the Agreement

A franchise agreement is a legal document that legally binds the parties of a franchise deal to perform their stated duties and responsibilities.

In the majority of cases, the franchise agreement is entered into between a franchisor and a franchisee. A franchise agreement details the different terms and conditions of a franchise deal and stipulates the specific roles of each party once the agreement comes into place.

A franchise agreement is important because it lays out all the necessary terms, conditions, legalities, and expectations of all parties entering into the franchise deal.

This means that if there are any conflicts in the future between these parties regarding any process, matter or relationship concerning the franchise agreement, then the parties can refer to the franchise agreement. The franchise agreement will contain specific terms, conditions, and potential conflict situations which will be explained, and solutions provided for.

The parties can then use this content to resolve their conflict. Various different types of franchising agreements exist in South Africa.

Four of the most common types of franchising agreements include:

  1. Master franchising – provides the franchisee with full and exclusive rights to own, operate, and sell the products and services of the franchise within a specific geographical area for a specified period of time. The franchisee is also granted the rights to own and operate more than one brand franchise location, as well as the rights to essentially act as a franchisor and offer other franchisees the opportunity to own a brand franchise store in question.
  2. Area developer franchising – provides the franchisee with the rights to develop and open multiple different brand franchise stores in a specified geographical area. The franchisee enters into this agreement with the objective to open multiple brand franchise stores within a certain period of time. The terms and conditions within this agreement will stipulate exactly how many stores the franchisee is expected to open within a specific area and timeframe.
  3. Single-unit franchising – provides the franchisee the rights to own and operate only one brand franchise store.
  4. Multi-unit franchising – provides the franchisee the rights to own and operate more than one brand franchise store in a specific geographic area. Usually the franchisee does not need to specify exactly how many stores they would like to open when entering into this agreement.

The Key Elements You Need to Know

what to expect

Usage of the brand’s trademarks

One of the key elements of a franchise agreement is the use of a trademark. Perhaps the main granting right that a franchisor grants to a franchisee is the use of the franchise’s trademark. This granting right is important because naturally, in order for the franchisee to sell the products or services of a specific franchise brand, they will need to make use of the brand’s trademarks.

Trademarks include the registered and recognizable name, slogan, phrase, logo, or symbol that differentiates one brand from another. Different franchises will have different trademarks, and franchisees will be granted the right to use a franchise’s trademarks as they deem most beneficial. However, a franchise agreement may include a clause which prohibits the use of a trademark in specific situations.

For example, Sorbet, one of the leading beauty service franchises in South Africa, will grant their respective franchisees the right to use their trademarks. This will include Sorbet’s name, logo and identifying symbols, advertising jingles, and slogan to name a few. However, the Sorbet franchise agreement may contain a clause which stipulates that their logo may not be used in situations which go against their brand values and beliefs.

Terms of the franchise

Like any other agreement or contract, a franchise agreement will contain and describe the different terms and conditions of the franchise deal. More specifically, a section of the franchise agreement will be dedicated to a variety of terms and conditions relating to the operation and ownership of the franchise. Some of these terms and conditions may include: grant terms, payment terms, termination, territory rights, restraint of trade, confidentiality, insurance requirements, and dispute resolution.

The sub-titles included in the terms of the franchise agreement section will need to be clearly explained so that all parties have a clear understanding of what can and cannot be done once the agreement comes into effect. A franchise agreement will thus usually also include a definitions section, where specific industry and contractual-related terminology will be defined.

For example, a franchise agreement for an automotive franchise will contain a definition section where contractual automotive-related terminology will be defined and expanded on. Perhaps the term ‘Dealership’ will be fully defined and explained so that all parties of the agreement have a clear understanding of this term.

Obligations and duties of the franchisor

A franchisor will have specific responsibilities and duties that they will need to perform when the franchise agreement is enforced.

Franchisor’s will have different obligations and duties for different franchise agreements. Therefore it is important that all these obligations and duties are clearly stated. Since the franchise agreement is legally binding, the franchisor will be required to perform each of the obligations and duties listed in the agreement.

Although each franchise agreement will state different and unique obligations and duties that the franchisor must perform, there are specific examples of duties that are frequently stipulated in franchise agreements.

For example, a franchisor of a popular franchise such as Pick n Pay may be requested by a franchisee to specifically perform the common obligations and duties of providing training, business advice and consulting, financial support, and assistance with searching for a location for the franchise store.

Once the franchise agreement is signed by both parties, the franchisor will be legally obligated to perform these activities as stated.

Minimum performance standards

Just like the franchisor will have certain obligations and duties that they will need to perform, so too will the franchisee.

These responsibilities will be defined in the franchise agreement within the context of minimum performance standards. Minimum performance standards outline the minimum levels of success that a franchisee needs to achieve with their franchise store/s. Many different performance measures exist, including sales per month, the number of products sold per month, the number of new clients acquired per week, the number of new franchise stores opened per year (for a multi-unit franchisee), and so forth.

A restaurant franchise may require that each of their franchise stores sell at least 500 main course meals a day to sit-down customers. Franchisees will need to put in place processes and strategies in order to ensure that these and other minimum performance standards are met.

Advertising standards

Franchisees will need to comply with the advertising and marketing stipulations outlined in the franchise agreement. These advertising standards are usually applied to all franchisees who own and operate a specific franchise brand. The purpose of regulating advertising activities for a franchise is so that all franchise stores communicate the same brand message to consumers, thus eliminating any brand identify confusion. This means that all franchisees will be utilizing exactly the same marketing materials.

For example, suppose that a takeaway franchise restaurant is launching a new menu item in all of their stores. The franchisor has created various different marketing materials to market and advertise this new menu item. All franchisees will be required to advertise the new menu item, making use only of the specific marketing materials provided by the franchisor.

Franchisees may not create their own unique marketing materials. Additionally, franchisees may be required to publish the marketing materials provided to them on specific days or during specific times of the day.

It’s Time to Take the Next Step

Rather than being viewed as a restrictive document, the franchise agreement should be seen as a document which outlines the responsibilities of a franchisee in terms of the rights granted to them. Since each franchise agreement will vary in terms of its content, all parties to the agreement should carefully evaluate and review all of the different stipulations stated in each element and section of the agreement.

The franchise agreement is the steppingstone to an unforgettable business journey. Remember to take each stride as it comes, and don’t forget to stop and be proud of what you’ve achieved.

We’ll always be available to assist you in your journey. All you need to do is contact us.