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The Franchise Agreement

How does it differ from the Franchise Disclosure Document?

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What is a franchise agreement and how does it differ from the Franchise Disclosure Document (FDD)?

Franchise Agreement Defined

A franchise agreement is the legal document that binds the franchisor and franchisee together. This document explains what the franchisor expects from the franchisee in running the business.

The agreement is designed to assure that all of the franchisees within an organization are treated equitably. The expectations must be uniform throughout the system.

Difference from the FDD

The franchise agreement is a document that is signed by both parties upon completion of the deal to do business together. In contrast, the FDD is a document that is presented prior to the final agreement. The potential franchisee has the opportunity to review this information before making a final determination as to whether or not to move forward in becoming a franchisee within the organization.

The type of information provided by the FDD entails comprehensive details about the company's background and history. Included in this document is the disclosure of any lawsuits or bankruptcies that has occurred within the franchise organization. Also incorporated in this document is a host of financial data as well as distribution channel information. Any confidentiality restrictions are also disclosed, as far as what a franchisee may and may not discuss with others.

On the other hand, the franchise agreement provides outlines on how the franchisor expects the franchisee to run the operation.

What is Included in the Franchise Agreement

Listed below are the main ingredients of a franchise agreement:
  • Contract Explanation - The contract explanation is the part of the agreement that outlines the type of relationship a franchisee is entering into with the franchisor.
  • Operations Manual - The operations manual is the section of the agreement that details the guidelines that the franchisee must legally follow in operating the business as outlined by the franchisor. From time to time amendments may be made and the franchisee must be prepared to adjust operations accordingly. The franchisee needs to be aware that the contents of the document are confidential.
  • Proprietary Statements - Proprietary statements outline how the franchise name is to be used, as well as the marketing and advertising procedures in place that the franchisee will be required to follow. Also, the franchisor documents how much the franchisee will be required to contribute toward national advertising efforts.
  • Ongoing Site Maintenance - Ongoing site maintenance is another item that is outlined in the agreement. Included are the types and timeframes regarding various maintenance items and upgrades that must be made to the franchisee's location.
As in any legal document, it is recommended that you have your attorney review the franchise agreement before signing so that you are certain you have a clear understanding of all of the contents.

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