What is a franchise agreement?
Given that a franchise is a commercial contract, since they are commercial acts for profit, what would be the definition of a franchise contract in commercial law? We call franchising contract the final document that will regularise the legal relationship between franchisee and franchisor. and, therefore, it will determine what role each one has in the development of this process. The former – the franchisee – must claim from the latter – the franchisor – the fulfilment of the agreements and obligations set out in the contract.
Characteristics of a franchise contract
Once we are clear on the definition of a franchise contract, it is key to identify the common elements, i.e. what characterises these contracts:
- Onerous: the franchisee makes a profit in exchange for a payment to the franchisor.
- Commutative: both parties know their own obligations and advantages from the beginning of the relationship.
- Atypical: not regulated in the Civil Code.
- Consensual: there must be consent in order to carry out the legal effects.
- Bilateral: there are reciprocal benefits.
- Successive tract: the obligations of each party do not end at the end of the contract, but continue beyond it.
Rights and responsibilities of the franchisee and the franchisor
In order to understand the rights and responsibilities of both parties, it is essential to differentiate between them. On the one hand, the franchisor is the founder of the brand and the supplier of the productservice or brand. Their rights and responsibilities include passing on know-how to franchisees, having a package that guarantees commercial success and having a certain financial capacity, among others.
On the other hand, the franchisee is the one who acquires the right to market the product, service or brand.. Their tasks include paying the agreed conditions, not offering different products, applying the rules of the Operations Manual, using the Know How for the operation of the business…
Exclusive use of brands, products and services
In commercial franchise contracts, it is very common to require exclusive sourcing from suppliers provided by the franchisor’s head office. The aim of this is that the franchise acts as a central purchasing centre and is able to increase its sales and therefore reduce prices.
Technical support and assistance from the franchisor
The franchisor is obliged to provide technical and commercial support to the franchisee throughout the duration of the contract. The franchisor’s know-how is not something immobile and static, it is a set of techniques that are constantly evolving.. The franchisee has the right to demand this continued assistance in case he does not receive it, we cannot forget that he pays for it.
Royalty and periodic payments
There are usually three royalties:
- The entry fee: the amount that the franchisee must pay to belong to the chain, and will pay for each of the franchises he/she wants, even if they belong to the same head office.
- The maintenance fee: this is the periodic amount (fixed or variable) to be paid by the franchisee to the franchisor.
- The advertising fee: these are the franchisee’s financial contributions to participate in advertising and marketing campaigns.
Duration and renewal of the contract
The franchise contract has a duration of 5 to 10 years, with or without the option of renewal.. Normally, the extension of contracts of less than one year is automatic. However, there are several other options, such as establishing an open-ended contract. The franchisor is obliged to give the franchisee six months’ notice if he does not wish to renew the contract.
Types of Franchise Contracts
Among the types of franchise contracts, we can highlight the following:
A branded franchise is a franchise model in which the franchisor grants the franchisee the right to use its trademark, name and logo in the franchisee’s business.
A product franchise is a franchise model in which the franchisor provides the franchisee with the right to sell its products or services under its brand name and using its business system.
A systems franchise is a type of franchise that focuses on providing software and technology solutions to businesses and individual customers. The franchisor in this case is a company specialised in the development and sale of computer systems, software, hardware and/or networks.
An area franchise is a franchise model in which the franchisor grants the franchisee the exclusive right to operate and develop the brand and business system in a certain geographic area.
This term implies that a franchisor integrates small entrepreneurs who can make positive contributions to its franchise.
Considerations when signing a Franchise Agreement
Some parts of the franchise contract that are important to bear in mind are:
Assessing the strength and success of the franchise model
It is very important that sales forecasts are based on well-founded market research. It should be noted that the rule does not oblige the franchisor to hand over the result of the investigation to the franchisee. On the franchisee’s side, it is important to be well informed about the future expectations of the brand, as this is often the decisive point for taking the step. Misinterpreting data is a common cause of future franchisee failure. Therefore, a thorough investigation of the franchise’s financial history, investment cost and franchise fees, the current industry, and contact with other franchisees of the same brand will be necessary. With these tips, the future success of the franchise will be much easier.
Analysis of the terms and conditions of the contract
The franchise contract is a contract of adhesion, where most of the clauses do not require negotiation by the franchisee.. For this reason, care must be taken, as the franchisor may play in your favour and impose a clause that is out of place. Often there is also a big difference between the responsibilities and obligations of the franchisee and the franchisor.
Market and competition research
When investing in a franchise, it is important to ensure that it is a profitable business.. It is essential to understand the needs, habits and preferences of customers in order to personalise sales strategies and get closer to them. The relevance of assessing the competition (strengths, weaknesses, marketing strategies, prices…) should not be underestimated. With this information they can develop strategies to reach their target audience.
Legal and financial advice
As we have already explained above, it can sometimes be difficult to understand by oneself all the terms and conditions of a given contract, such as the civil code franchise contracts, which is why we recommend that you consult a lawyer specialised in the subject.
Long-term planning and goal setting.
If a franchise is to develop successfully, it must be trained to do so.. By setting long-term objectives, resources, systems and funds can be better organised to support the operations of different units. Otherwise, if the company is not equipped to grow, it will not grow even when it has an opportunity.
To automate your franchise contracts and keep them all well organised, we remind you that Bounsel Flow is available to you! Bounsel is a document automation software that will help you cut down on paperwork and make your working life easier, saving you time that you can use for relaxation. Sounds good, doesn’t it?