Franchise contract clauses

A franchise agreement is a legally binding document that outlines a franchisor's terms and conditions for a franchisee.

Each franchise is governed by these terms, which are generally described in a written agreement between both parties.

The franchise agreement will govern everything about how the franchisee runs the new business and what they can expect from the franchisor.

Learn more about the content of the agreement and what it will mean if you decide to franchise your business or become a franchisee.

In Romania, a business becomes a franchise if it meets the definition established by Law 179 of 2019, known as the Franchise Law. According to the legislation, there are three general requirements for a franchise agreement to be considered official:

The franchisee's business is substantially associated with the franchisor's brand. In franchising, the franchisor and each of the franchisees share a common brand. The franchisor exercises control or provides substantial assistance to the franchisee in the way the brand is used the franchisor to carry out activities. Because the franchisee is an independent contractor and not a joint employer, these controls generally cover brand standards and do not extend to the franchisee's human resources, nor do they extend to how the franchisee manages its business—other than meeting the requirements of the brand standards - daily.

The franchisor receives a fee from the franchisee for the right to enter into the relationship and conduct business using the franchisor's trademarks. The fee may be an initial fee or it may be an ongoing fee.

A franchise agreement is a license that sets out the rights and obligations of the franchisor and the franchisee.

This agreement is designed to protect franchisor's intellectual property (IP) and ensure consistency in how each licensee operates under its brand. Even if the relationship is codified in a written agreement that is meant to last up to 20 years, the franchisor must have the ability to develop the brand and its consumer offering to remain competitive.

The contract must also be flexible enough to allow the franchisor to make contractual changes that reflect decisions in response to the franchisees' specific needs. However, there are no changes to the stipulation that franchisees must manage their independently owned businesses on a day-to-day basis in compliance with brand standards.

Law 179.2019 requires franchisors to provide prospective franchisees with a Franchise Information Disclosure (DDI) document, which is designed to provide prospective franchisees with the information necessary to purchase a franchise. Considerations include risks and rewards, and how the franchise compares to other investments.

The franchise agreement is long, detailed and provided to prospective franchisees as an exhibit to DDI well in advance of signing it to ensure they have time to review the agreement and receive advice from their attorneys and other legal advisors.

Franchising is a consistent and sustainable replication of a company's brand promises, and a contract must detail the many business decisions involved in creating a franchise system. It is complex and, in most cases, a contract of adhesion, which means an agreement that is not easy to adjusted.

Because a franchise agreement is meant to reflect the uniqueness of each franchise offering and explain the dynamics of the intended franchise relationship, copying the agreement of another franchise system is probably the biggest mistake a new franchisor can make.

When developing an appropriate set of franchise agreements, each of the elements of the franchise must be evaluated.

Before the lawyers start drafting the agreements, it is essential for the franchisor to first develop their business plan and decide on all these important issues. For most franchisors, it is important that, in addition to working with qualified franchise attorneys, they first work with consultants experienced and qualified franchisees to develop their franchise offering.