The franchise contract, like the Uniform Franchise Offering Circular (UFOC), is a very important document. The contract is probably the most important document in the transaction process. It is a legal commitment which is binding on both the franchisor and franchisee. In the franchise contract, the franchisor’s promises must be presented to the franchisee in writing and subjected to careful scrutiny. During this stage of the buy/sell process, the franchisee must have competent legal advice regarding the meaning and effect of the contract.

When reviewing the contract, you and your attorney, will need to determine if it confirms what you have been told. If you find improprieties in the contract at this point, you may decide to withdraw from the transaction before committing your time, energy and money to an agreement that may not be beneficial for you. If, however, you choose to continue with the process, you may be able to negotiate favorable terms, but remember by signing the contract, you are legally bound by the provisions of the agreement.

The franchise contract consists of two main parts: 1) the purchase agreement and 2) the franchise or license agreement. For convenience, occasionally the franchise transaction is split into two stages. When this happens, some franchise companies have two contracts, one for each stage, rather than a single contract. While it isn’t necessary to have two contracts, it can be the better method where there is a comprehensive equipment and initial services package.

The purchase agreement of the contract covers:
– the franchise package
– the price
– the services to be provided.

The franchise or license agreement covers:
– the rights granted to the franchisee
– the obligations undertaken by the franchisor
– the obligations imposed upon the franchisee
– trade restrictions imposed upon the franchisee
– assignment/death of franchisee
– termination provisions.

A brief explanation of each agreement follows.

PURCHASE AGREEMENT

1. The franchise package. Consists of an equipment or inventory list. This list must contain all the items the franchisee has been told to expect. Some franchise companies regard this list as being confidential and stipulate in the contract that it must be so treated.

2. The price. The price and the manner of payment will be specified. This may be cash on signature, although rare. More often a deposit is required on signature with payment of the balance to follow on delivery of the equipment or at other stages of the transaction.

3. The services to be provided. This section outlines or lists the franchisor’s responsibilities to the franchisee. Those services the franchisor is required to provide the franchisee before he or she is ready to open for business are called the initial services. Those services the franchisor provides periodically are called continuous services. A more detailed explanation of the services provided by the franchisor are included in the next section on the license agreement.

In part 2 we will be looking at the franchise or license agreement with a view to understanding what is contained within what could be some very complicated documents.

Author Bio: Matthew Anderson is the founder and head of advertising for The Franchise Shop website which specialises in New Franchises for sale and is the largest UK franchise opportunities directory and experts in starting a franchise and franchise ideas

Category: Business
Keywords: new franchises,franchise ideas,franchise marketing