Franchise Agreement and accompanying franchise documents

Author of the original article: Krasimira Kadieva

Author of the English version: Boyana Boyadzhieva

I. Introduction

This article will provide detailed information on the franchise agreement as well as the documentation accompanying the franchise.

New businesses are being created every day all over the world that need to be built and marketed from the ground up. This requires a lot of time and investment – statistics show that over 90% of startups are unsuccessful. This percentage can be significantly reduced in case a franchise business model is used, as the established brand and the developed business model have proven to be successful in the market and this is an opportunity to start and develop your own business with the lowest risk and more security. On the other hand, the advantages of franchising are also for the franchisor as it is an opportunity to expand the business and increase revenue. What is special in this case is that the franchising business model is not a popular method of starting a business in Bulgaria, but in recent years franchising has seen a growth of over 20% not only in Bulgaria but also worldwide.

Of course, before starting a franchise, it is necessary for the parties (franchisor and franchisee) to settle their legal relationship by signing a franchise agreement. In addition to the franchise agreement, a number of other documents need to be drawn up, such as a manual (internal rules, instructions) to the franchise agreement, a trade secret protection agreement, a profit and loss table, a document with a full description of all fees paid to the franchisor, a questionnaire to the franchisee, a document describing all types of costs for the investment required by the franchisee, a document containing information on the advantages of entering into a franchise agreement, information document, etc. Information on all these documents will be provided in this article.

II. Franchise Agreement

1. What is a franchise agreement?

By the franchise agreement, the franchisor grants the franchisee, in exchange for remuneration, the right to use the franchisor’s established structure and business model, including its trademark, and all business development procedures and management systems, on specifically agreed terms. Section 1(10) of the additional provisions of the Corporate Income Tax Act defines a “franchise” as a set of industrial or intellectual property rights relating to trademarks, trade names, company signs, utility models, designs, copyrights, know-how or patents granted for consideration, to be used for the sale of goods and/or the provision of services.

2. Similarities and differences between a franchise agreement and a license agreement

Often the franchise agreement is confused with the license agreement, the definition of which is given in Article 587 of the Commercial Act, according to which “by the license agreement, the holder of the right to an invention, utility model, industrial design, trade mark, integrated circuit topology or manufacturing know-how – the licensor, assigns the use thereof in whole or in part to the licensee for a consideration.“Although there are many similarities between the two agreements, there are also many differences between a franchise agreement and a license agreement. The question of what are the similarities and differences between a franchise agreement and a license agreement is answered in detail in a separate post on this topic, which is available here.

3. Contents of the franchise agreement

Identification of parties

The franchisor and franchisee parties should be identified. These are mainly legal entities, therefore the full names, UIC, registered office address of the head office, and name of the person representing them should be indicated. It is also a good idea to provide an e-mail address.

General provisions and definitions

In this part, the intellectual property of the franchisor can be individualized (e.g. trade mark with detailed information about the brand, industrial design, etc.). It is also useful to define some of the terms that will be used in the franchise agreement such as franchise, subfranchise, trade secret, documentation, etc.

The subject matter of the agreement

This part of the agreement should describe in detail the subject matter, which consists of cooperation between the parties to enable the franchisee to provide specified services or produce specified goods under the franchisor’s brand in a territory specified in the agreement for a specified period.

Territorial scope

The territorial scope should be defined very precisely – in which territory the franchisee will offer the services subject to the franchise agreement. It may be agreed that only the franchisee will offer the services in the territory specified in the agreement, or that there will be no such restrictions and that the franchisor will be entitled to enter into a franchise agreement with other franchisees for the same territory. However, it is logical that if, for example, a fast food outlet is opened as a franchise of a well-known chain, the distance between the two outlets should not be less than 1.5 – 2 kilometers, for example. These conditions shall be specified in detail in this part of the agreement.

Franchisor’s remuneration and method of payment

The franchise agreement is a remuneration agreement, therefore it is necessary to specify in this part how the remuneration will be determined. The remuneration under a franchise agreement can be determined in several ways:

– a fixed amount – this amount is paid over a period of time, for example, every month, every three months.

– payment of installments (royalties) – these installments are paid at the end of fixed terms and are a percentage (%) of the turnover realized.

– mixed payment – a lump sum at the signing or entry into force of the agreement and royalties at a fixed period of time (quarterly, at the end of each year, for example).

It may also be agreed that an initial fee, the so-called introductory payment, is payable.

Franchisor’s rights and obligations

The franchisor has the right to receive the remuneration agreed in the agreement and also to inspect the quality of the relevant services provided in the franchisee’s business premises, for example.

The franchisor’s obligations most often relate to assisting and helping the franchisee technically and marketing to successfully carry out the provision of the services, as well as conducting training of the franchisee, supervising and providing detailed rules containing requirements, rules of operation, structure, and organization of the enterprise, necessary requirements regarding the facility, equipment, and inventory, customer handling, marketing terms, penalties, etc.

Franchisee’s rights and obligations

The franchisor undertakes to pay the remuneration agreed in the agreement, to manage the business in accordance with the rules described in detail and provided by the franchisor, not to damage in any way the established reputation of the franchisor, to ensure the legally necessary compliance of the business activities carried out by the franchisor, to strictly follow the requirements of the franchisor regarding the provision of services, and not to make any changes in the technological process of the services offered by the franchisor.

Intellectual property rights

This section should detail the intellectual property rights, such as that the franchisee undertakes not to apply for or register any trademark that is identical or similar to the franchisor’s trademark, both during the term of the franchise agreement signed between the two parties and after its termination.

Trade secret

This is an extremely important topic and it is therefore advisable that confidentiality obligations are detailed in a separate confidentiality agreement (a trade secret protection agreement), on which more information will be provided later in this article.

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The franchisor shall comply with Franchisor’s established advertising strategies and requirements.

Control

To maintain the quality of the services offered or the goods produced, the franchisor shall exercise some level of control. It is in this section of the agreement that all the clauses concerning the control by the franchisor should be described in great detail, namely: the possibility of exercising control at any time; the possibility of giving recommendations and instructions to the franchisee, which will be binding; the possibility of terminating the agreement in the event of non-compliance with a recommendation and/or an instruction following the results of an inspection of the quality of the services.

Protection of personal data

The clauses concerning the protection of the personal data of natural persons are of utmost importance, therefore the franchisee should comply with the legislation in force in this area, as well as take the necessary technical and organizational measures to protect the personal data it processes against accidental or unlawful destruction, accidental loss, unauthorized access, alteration, dissemination, as well as against any other forms of unlawful processing.

Term and automatic renewal. Termination.

This part should determine the period for which the franchise agreement is concluded and whether automatic renewal is possible, as well as the conditions for its termination. The agreement may be terminated at the end of the agreed term by either party giving a notice specified in the agreement. The agreement may also be terminated without notice by either party if the other party systematically (at least three times) fails to fulfill its obligations under the agreement, for example.

Non-performance. Penalties

It is necessary to detail the clauses concerning the non-fulfillment of the obligations, which are related to the payment of penalties.

Final Provisions

This last section of the franchise agreement agrees on the applicable law, amendments, correspondence between the parties, dispute resolution clauses, partial nullity, modification of the agreement, etc.

Naturally, the franchise agreement may also develop other sections, such as initial training, follow-up training, assignment of rights and obligations under the agreement, transfer of the business to the franchisee, performance standards, etc.

III. The documentation accompanying the franchise agreement

As mentioned at the beginning of this article, before starting the franchise activity, it is necessary for the parties to settle their legal relations by signing a franchise agreement and preparing the accompanying franchise documentation. What are the other documents that need to be prepared? These are mainly a manual (internal rules, instruction) to the franchise agreement, a confidentiality agreement, a trade secret protection agreement, a table of income and expenses, a document with a full description of all fees paid to the franchisor, a questionnaire to the franchisee, an information document, etc.

1. The manual (internal rules, instructions) to the franchise agreement is an extremely important document and without it, in my opinion, it is virtually impossible to operate a franchise business. It is an extremely detailed document that describes in great detail:

– the franchisor’s objectives, beliefs, and aspirations, the techniques used to achieve the objectives, the franchisor’s market experience;

– pre-opening procedures that the franchisee must complete;

– remuneration, term, and method of payment;

– a full description of the services provided/goods produced;

– internal rules and policies: rules on hygiene; working hours; uniforms of employees; relations with clients; method of payment by clients; remote ordering of services/goods provided, where this is possible; duration of services provided; price for services provided; conditions for quoting prices and preparing price lists; rules on confidentiality; salary formation; provision of bonuses/extra remuneration/employee remuneration; relations relating to third parties (other than clients); conditions for concluding d

– recruitment rules: method of recruitment; whether franchisor consent is required for recruitment; recruitment channels; method of interview; job positions (description of duties);

– training rules: criteria to be met by the training to be given by the franchisee to the staff it employs; types of training offered by the franchisor; how the knowledge of trained staff is tested; consequences of failure to provide training;

– preparation and storage of documentation: documentation to be prepared in connection with the franchise agreement and method of storage; access to documentation;

– site requirements: this section describes all the requirements that the franchisor has for the site (design, colors, locations, accessibility, parking, etc., conditions for video surveillance);

– storage conditions for the equipment, materials, software, etc. provided;

– rules for carrying out inspections;

– violations and sanctions;

– criteria for the goods used: this section describes the criteria that the goods, used by the franchisee to provide the services covered by the franchise agreement, must have;

– marketing and advertising rules: this section deals with the conditions for advertising, promotional campaigns, merchandising, marketing campaigns, etc., as well as the franchisor’s requirements for its online and media presence and the conditions for the opening campaign;

– requirements for creating a website;

– procedure for termination of the franchise.

2. Information document from the franchisor

This document is important to prepare because it provides information on: – the franchisor; – the pre-agreement relationship; – the fees required; – whether there is an option to renegotiate the franchise agreement; – whether initial and follow-up training is provided; – whether assistance is provided; – renewal information; – information on monitoring; – a list of franchisees; – information on franchise agreements terminated to date.

The information in this document needs to be described as the franchisee will be able to assess and make an informed decision on whether to pursue further negotiations with the franchisor.

3. Trade Secret Protection Agreement

The other extremely important document is the confidentiality agreement (the so-called trade secret protection agreement), which should contain:

• Identification of parties (disclosing and receiving party);
• The purpose for the disclosure of trade secrets;
• A detailed description of what constitutes a trade secret: – the definition of a trade secret; – the subject matter of the trade secret; – the measures taken by the Disclosing Party to keep the trade secret secret secret; – the persons entitled to access and use the commercial information, know-how and technological information constituting the trade secret.
• Acquisition, use, and disclosure of trade secrets: – lawful acquisition, use, and disclosure of trade secrets; – unlawful acquisition, use, and disclosure of trade secrets.
• Rights and obligations of the parties: – obligation not to disclose trade secrets; – non-use and non-disclosure obligations; – trade secret rights and licensing agreements; – due diligence. Notification upon disclosure; – duty of non-disclosure; – return of confidential information.
• Compensation for failure to comply with the trade secret protection agreement.
• Remedies: – liability of the Host Party for breach of its obligations; – liability under the Trade Secrets Act; – liability under the Competition Act; – costs of the proceedings.
• Term.
• Additional provisions: – independent status of the parties; – non-involvement of the parties; – amendment of the agreement; – form of validity of communications and notifications between the parties; – dispute resolution; – time limit; – applicable law; – amendments.

4. Income and expenditure table.

5. A document containing a description of all types of fees payable to the franchisor, such as: entry fee; monthly fee; annual fee; advertising fee; training fee, etc.

6. A document containing a description of all types of costs for the required investment by the franchisee: premises costs; premises repairs; furniture and equipment; vehicles; computers and telecommunication; additional capital; other costs: – accountant; company registration costs; – insurance; – permits; – initial charge; – contingency.

7. A document containing information on the advantages of concluding a franchise agreement.

8. Franchisee Questionnaire.

Drafting a complete, legally sound and tailored to the parties’ wishes franchise agreement and accompanying franchise documents requires special attention and specialized knowledge, and it is best to contact an attorney to draft these documents. The team at Krasimira Kadieva will be happy to assist you in drafting a franchise agreement and all accompanying franchise documentation. Krasimira Kadieva Law Firm is a boutique highly specialized law firm that provides services exclusively in the areas of agreement law, data protection, internet law and intellectual property. One of the most frequently commissioned services in the past years, in the practice of the law firm, are services related to the drafting of agreements, including franchise agreements and accompanying franchise documents.

In order to provide a complete service regarding the start-up of a franchise, our team developed the service “Consulting and preparation of a franchise agreement and the accompanying franchise documents”.

The service “Consultation and preparation of a franchise agreement and accompanying franchise documents” includes:

1. Consultation on the preparation of the franchise activity from the legal side;

2. Preparation and submission of the following documents, namely:

• Franchise Agreement;
• Manual (internal rules, instruction) to the franchise agreement;
• Information document from the franchisor;
• Trade Secret Protection Agreement;
• Income and expenditure table;
• A document with a complete description of all fees paid to the franchisor;
• A document containing a description of all types of costs for the required investment by the franchisee;
• A document containing information on the benefits of entering into a franchise agreement.
• Franchisee Questionnaire.

3. Assistance in negotiations with the franchisee until the conclusion of the agreement.

If you would like more information about the service “Consulting and preparation of a franchise agreement and accompanying franchise documents” you can contact us on 00359 882 308 670 or by using the contact form on this website.