A franchise agreement is a contract under which the franchisor grants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor’s trademark. In exchange, the franchisee makes one-time or periodical payments to the franchisor in the amount, terms, and conditions established in the franchise agreement. The franchisee may have to make one-time, monthly, quarterly, or annual payments to the franchisor. Depending on the type of franchise and payment, the franchisor and franchisee may agree that such payments are made with different periodicities. Among others, the franchisee might pay some or all of the following types of payments to the franchisor: initial franchise fee, continuing royalties on sales, rent, advertising assistance, or equipment and supplies.
The franchise agreement may also stipulate that the franchisee may only operate the franchise in an assigned territory. However, not all franchise agreements establish an exclusivity right over a specific territory in favor of the franchisee. The franchise agreement may also limit the right of the franchisee to sell over the internet.
The franchise agreement should outline the rights and obligations of both the franchisor and the franchisee. The main purpose of this contract is to protect the intellectual property of the franchisor. It also seeks to guarantee that each franchisee operates the franchise consistently with the franchisor’s trademark and know-how.
Franchises are governed by a combination of federal and state laws that establish the rules for the registration, offer, and sale of them, such as the Federal Trade Commission’s Franchise Rule.
McDonald’s, KFC, Burger King, Domino’s, and 7-Eleven are some of the most famous franchises in the United States.
[Last updated in July of 2021 by the Wex Definitions Team]