A franchise agreement is a contract between a franchisor and a franchisee. Under a typical franchise agreement, the franchisor agrees to supply the franchisee with a product or service that it has developed in exchange for an initial franchise fee. The franchisee, in turn, pays the franchisor for the right to sell that product or service to others for a profit.
This may seem simple, but it serves as the basic framework for all franchisor-franchisee relationships after the franchise has been registered. The proper drafting and execution of franchise agreements can benefit both sides of the deal. However, these are complex contracts that involve a unique mix of securities law, intellectual property, and often real estate. A franchise agreement should always be drafted or reviewed by an experienced franchise attorney who is familiar with the nuances of North Carolina and federal law.
Under almost every franchise agreement, the franchisor must allow the franchisee to use its trademarks and products, including the brand name and associated proprietary goods or services. Additionally, most franchisors are required to protect the intellectual property that is being licensed, support the franchisees before and after they open for business, and to continuously develop the franchise system as a whole. Franchise agreements are largely one-sided in that they place a lot of obligations on franchisees while franchisors seem to reap most of the benefits. However, this makes sense because the franchisor has devoted significant amounts of time and energy into developing its brand and products or services. The franchisor is taking an enormous risk by allowing someone else, the franchisee, to use those things independently.
The exact terms of each franchise contract vary widely, but within a franchise system, they should be fairly uniform. Simple franchise agreements may grant the franchisee the ability to use the franchisor’s brand to sell a service in exchange for a monthly royalty fee. More complex agreements may involve the purchase and sale of inventory from the franchisor on a recurring basis. Due to the complex nature of most franchise agreements, the Federal Trade Commission requires all franchise offerings to be made with a Franchise Disclosure Document. This contains the franchise agreement along with a detailed explanation of all the provisions contained within the contract.
When reading any franchise agreement, it will appear as though the franchisee is “signing their life away” to the franchisor. It is true that franchise agreements are drafted heavily in favor of franchisors. However, the general idea behind franchising is that franchisees use the franchisors’ ideas and systems to make money. It follows, naturally, that franchisees would be heavily restricted in what they can and cannot do with the franchisor’s ideas and systems.
Under every franchise contract, the franchisee is required to make some sort of payment to the franchisor. This is usually an initial franchise fee, but it can also be called a “deposit.” The fee can also be lumped into the purchase of equipment or an initial inventory. There will be some type of fee paid to the franchisor. Then there will be some type of territory restriction. The franchisee may get an exclusive territory, a protected territory, an open territory, or perhaps no territory at all. Certain franchise systems work well with different types of territories.
There will also be strict restrictions on how the franchisee may use the franchisor’s intellectual property. For instance, most franchisors don’t allow franchisees to create separate websites or to use the franchisor’s branding on products that the franchisor has not approved.
The franchisee may be required to be physically present at the business during all normal business hours. Alternatively, the franchisee may be allowed to be an absentee owner, which would enable them to hire a manager for their franchised business.
In every franchise agreement, there are dozens to hundreds of obligations for franchisees. Most of these are enforceable under North Carolina law. However, some are not. It is important to have a franchise attorney experienced with North Carolina law draft franchise agreements for use in North Carolina.
Franchise agreements carry the full weight of the law, meaning that franchisors must provide the privileges outlined in the contract as long as the franchisees fulfill their obligations. A properly crafted franchise contract is essential to North Carolina franchisors, and our attorneys could help you construct an agreement that allows you to license the right to use or sell your products and services while protecting your company’s reputation and intellectual property. Legal counsel could even help to negotiate the terms of these deals, allowing future franchisees to enter into agreements that best serve everyone’s needs. Contact a Charlotte lawyer today to evaluate potential options for North Carolina franchise agreements.