Federal laws and the laws of many states require that every franchise company submit to prospective franchisees a document that specifies, in detail, the terms under which the franchisor and franchisee will do business together. This contract is commonly known as the franchise agreement. By establishing standards of operation, the agreement helps to both alert a franchisee as to what is expected of him or her, as well as to ensure system-wide uniformity throughout a franchise.

Perhaps, no one part of the franchise development process is as important to the ultimate success of the franchise program as the drafting of the franchise agreement. It is essential that an attorney, who understands franchising and is familiar with the franchisor's business, prepare this agreement (see Francorp Consulting). It's equally important for the franchisor to personally participate in the development of the agreement, because he or she is the most knowledgeable about the circumstances and requirements of the business.

This is not the time to save money by copying a "standard" franchise agreement or for "boilerplate" legal work. Each franchise agreement should be as unique as the business it represents. It is the cornerstone of a franchise relationship, and it must be thorough enough to provide both parties with a clear understanding of that relationship.

By all means, you want to avoid the unfortunate situation that many franchisors encounter, when a problem arises with their franchisees. They rush to look at their agreements to see if the situation is covered, only to find that it isn't, and there is no easy legal remedy. The franchise agreement should also be fair to the franchisee-a well-drafted document will protect the franchisee and will meet with minimal objections from his or her attorney.

A good franchise agreement not only incorporates all of the elements of a sound business contract, but it also expresses, in legal terms, business decisions vital to the proper operation of the franchise and covers the following:

• Appointment and franchisee fee
• Location
• Proprietary market
• Training and assistance
• Franchisor's ongoing operations assistance
• Advertising
• Operating manual
• Confidential information
• Maintenance and repairs
• Accounting and records
• Standards of quality and performance
• Modification of system
• Continuing services and royalty fee
• Insurance
• Term
• Covenants
• Termination and defaults
• Rights and duties of parties upon expiration or termination
• Commencement and hours of operation
• Transferability of interest: Provide conditions under which franchisee can sell
• Death of franchisee
• Right of first refusal
• Operation in event of disability or death
• Taxes and permits
• Independent contractor
• Nonwaiver
• Notice
• Liability for breach enforcement: payment of costs, attorneys' fees by party in default
• Entire agreement
• Severabilty
• Applicable law
• Arbitration (where and when applicable)
• Franchisee acknowledges receipt of FTC or UFOC documents
• Define term "franchisee" to include success and all parties of interest
• Caveat