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The importance of a partnership agreement for the Franchise Business
Maria Misyurina
Franchising Guru Co-founder; Guru of franchise law, contract negotiations, franchise relations & expansion.
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Are you the Franchisor or Franchisee business that is owned by more than one director? Are you in this business to make a profit? If the answer is yes to both questions- it is vital that you sign a Partnership Agreement for you franchise business.
A partnership agreement is a binding contract between the parties of a partnership (two or more directors in the franchise business). Its purpose is to set out the terms and conditions of the relationship between the parties, such as the distribution of profits and losses, the duration, capital, percentages of ownership, how the assets will be divided.
Franchise directors who are in partnerships frequently encounter difficulties. It is, therefore, key to have a partnership agreement in place to record each of the parties’ intentions at the outset of the formation of the business.
Reasons why a franchise business should have a formal partnership agreement are:
Having a partnership agreement in place offers benefits and certainty to all parties concerned. Areas such as how profits of a franchise are distributed, how decisions in a franchise are made can be set out and agreed upon, and if differences or misunderstandings start to arise between the parties, a partnership agreement provides documented evidence as to what was agreed between all parties at the outset.
Each partner in a franchise may have contributed different amounts of capital, hence they are required to a higher share of profits and losses. This can be agreed in the PA. Alternatively, not every partner may take part in the management of the franchise business as this can be delegated to a managing partner and the adequate remuneration for such role is to be agreed at the outset and disclosed in the PA.
Having a partnership agreement can significantly reduce future costs that may be incurred in resolving a dispute between parties to a franchise.
In times of commercial uncertainty, which is often the main cause of disputes and disagreements, it is important that there is a clear procedure on how the company is run and how disputes are to be addressed.
(read further on other crucial documents for franchise businesses: What You Need to Include into The Franchise Disclosure Document)
