“You want the franchise to be the same and feel the same, whether you`re in a place in New York, Iowa or Europe,” Goldman said. Franchise agreements transfer the operating rights of a franchisor`s intellectual property and resources to a franchisee for a predetermined period. The rights and allowances awarded to a franchisee are very specific and leave little room for extension or error. “If you enter into a franchise agreement prematurely, you can be hit with liquidated damages, which is usually a two- to three-year royalty, and there will be a verdict that will require you to pay it back,” Goldman said. The agreement must also be flexible enough to allow the franchisor to make contractual changes that reflect decisions made in response to the specific needs of franchisees. However, there is no change to the provision that franchisees must manage their independent businesses on a daily basis in accordance with brand standards. From a franchising perspective, “exclusive” means that the franchisee is protected from opening another franchisee or granting rights to another franchisee for the purpose of creating a franchise within the agreed geographic area. The earliest food and hospital franchises were developed in the 1920s and 1930s. A-W Root Beer began franchise in 1925.
Howard Johnson Restaurants opened its first outlet in 1935, grew rapidly and paved the way for restaurant chains and franchises that still define the American fast food industry today. Not all franchise contracts are set in stone, but depending on the franchise, there may be room to negotiate certain points. Older, more established franchises are less flexible, while newer franchises may be more accommodating in some respects. After the initial duration of the agreement, there is usually an option for extension. This provides both franchisor and franchisee with the opportunity to undervalue the success or other means of the franchise. Although simply because renewal is an option, it is not guaranteed. The franchisor must be satisfied with the performance of the franchisee, both financially and the franchisee`s ability to follow the franchise rules without any infringement. The wording of the franchise agreement is essential, as misrepreshing may treat an alleged franchise agreement as a distribution agreement that has a number of different legal effects. In short, the franchise relationship is based on control and extent of influence, while a distribution agreement is narrower and does not deal with marketing and merchandising.