What Are Franchise Agreements?

Post by: Eric Jones | Posted Date: June 28th, 2016 |

Franchise agreements are the reason so many fast food restaurants, brand name convenience stores, and local operations for nationally recognized rental car companies exist. Signing a franchise agreement allows a person to open a store or office that has a recognized product and identity instead of launching a business from scratch.

Legally, a franchise agreement has five closely related basic elements:

  • Shared trademarks
  • Fees paid by the franchisee to the franchisor for licensing, royalties, renewals, and, often, profit-sharing
  • Common marketing plan
  • Similar customer base in a defined geographic area
  • Independent operation of the franchise location that complies with rules set by the franchisor

To back up a little, the franchisee is the person or corporate entity that pays the fees to use a larger company’s trademarks. The franchisor often started as an entrepreneurial venture, with the most recognizable examples probably being McDonald’s and 7-11. Both quickly grew from single stores in what were then rural locations to dominate the American roadside. The large majority of current storefronts bearing the familiar Golden Arches and orange-green-and-red numbers are franchise operations.

Franchising happens in nearly every business sector. Insurance offices, household and beauty product retailers (including home-visit operations like Avon and Mary Kay), and wireless phone stores are heavily franchised, as are trucking and moving companies and used car dealerships.

Before anyone signs a franchise agreement, he or she must understand exactly what the contract means for them and the franchisor. Sharing a trademark entails much more than hanging out a logoed neon sign or printing some business cards. Mandatory uniforms, standardized floor plans, and even scripts for greeting customers and concluding sales can be required. Under a standard clause of most franchise agreements, a franchisor’s representative who makes a site visit and finds any lapses in use of trademarks can start the process of terminating the agreement at the expense of the franchisee.

Similarly, franchise agreements often restrict the products franchisees can sell, the prices they can charge, and where a store or selling territory can be located. Hours of operation, advertising messages and placements, and the return of a percentage of gross sales to the franchisor are other common provisions of franchise agreements.

The preceding explanation of what a franchise agreement is should make clear why you must hire an Ohio franchise lawyer to read through a franchise contract before you sign it. The franchisor will write the contract in a way that simultaneously maximizes its own expected gain and limits its potential exposures to financial losses and legal liability for things like customers’ injuries. That is neither illegal nor unfair, but the franchisee has to know exactly what they are committing themselves to.

Figuring out what all the terms of a franchise agreement mean can be difficult for the simple reason that all business contracts get written in the arcane language of legalese. An experienced franchise contract lawyer can translate the document for an aspiring franchisee.

While negotiating the terms of a franchise contract is rarely possible, especially when the franchisor is very large and has decades of legal challenges under its belt, consulting with a franchise agreement lawyer could prevent a franchisee from accepting a legal duty to do something he or she would not be comfortable doing. Civil courts enforce franchise contracts, with even inadvertent and unintentional breaches sometimes resulting large financial judgments against franchisees.

A final consideration for franchisees is that each state regulates franchises differently. A contract entered into in Pennsylvania or Indiana may not be fully valid in Ohio. Before you sign a franchise agreement in Columbus, reach out to the business law attorneys at Jones Law Group. We have extensive experience interpreting and advising on franchise contracts. You can schedule an appointment online or by calling (614) 545-9998.

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