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What is a Franchise Agreement?


A franchise agreement is a binding contract between a franchisor and a franchisee. This document outlines in detail the terms of running a franchise business and therefore defines the franchisor/franchisee relationship. Some agreements are quite complex in their wording, and you should consult an attorney before signing one.

Within a franchise agreement, the franchisee is granted the legal right to establish a franchised outlet and operation wherein the franchisee, among other things, obtains the license and right to utilize the franchisors trademarks, trade dress, business systems, operations manual and sources of supply in offering and selling the products and/or services designated by the franchisor.

As a franchisor your franchise agreement will serve as the primary and most important legal document that will govern and define the legal relationship with your franchisees. Within your franchise agreement you will be granting your franchisees the legal right to establish and develop their franchised locations and, as a result, the franchisees will be undertaking the obligation to establish and maintain their franchised operations in accordance with the mandates of your system and to pay to you certain on-going fees.

If a franchisor promises something to a franchisee, the agreement must reflect those promises.

Termination Clause in a Franchise Agreement

With any franchise agreement, you should carefully read the document. You should especially make note of the termination clause. The termination clause specifies who may terminate the agreement and, equally important, under what conditions. Without a material breach of contract, most franchises terminate at the expiration of the contract or if the franchisee declines to renew the franchise options if either is specified.

A termination clause normally contains statements for either party to be able to suspend performance under the agreement when there is a material breach of contract by the other party or terminate their agreement when a material breach has occurred and not been resolved within a reasonable amount of time.

A material breach can occur when one party does not comply with the provisions of a valid contract. This can depreciate the value of the contract, and in some cases deprives some parties of the benefits of the original contract.

Generally speaking, the franchisor can terminate the agreement if a franchisee:

  • Fails to correct defaults after notice.
  • Loses a necessary license or lease.
  • Fails to pay back royalties.
  • Goes bankrupt.
  • Fails to follow franchisor requirements regarding location and appearance of franchise.
  • Is convicted of a crime.
  • Fails to comply with required operations for the franchise.

Likewise, the franchisee can terminate the agreement if the franchisor:

  • Fails to provide training and support as stipulated in the contract.
  • Commits fraud of misrepresents the potential profits.
  • Fails to protect the franchisee’s business opportunity.
  • Goes bankrupt.

North Carolina Franchise Agreement Attorney

With the assortment of state and federal laws relating to franchising and the seriousness of FTC and state rule violations, it is important to consult with an attorney who understands the nuances of franchise law. Contact the business litigation attorneys at Maginnis law, PLLC to speak with one of our attorneys today.

We regularly represent clients throughout the Triangle including Raleigh, Durham, Chapel Hill, Cary, Apex, Knightdale, Morrisville, and Garner. To speak with our attorneys, contact the firm at 919.526.0450, or send a confidential email inquiry using our contact page.