Commercial Law Attorneys

Franchise Agreements in Israel: What You Need to Know

A franchise agreement is a contract between a franchisor (the parent company or chain) and an individual or entity seeking to operate as a franchisee — managing a branch of the business and selling its products or services. This agreement governs every aspect of the relationship between the parties and has a significant impact on the franchise’s success. For this reason, it is essential to obtain legal advice and representation from a law firm experienced in franchise law before entering into such an agreement.

By Igal Mor, Adv. & Notary

Accuracy in Legal Advice. Excellence in legal support.

What Is Franchising?

Many retail branches in industries such as clothing, food, and electronics operate through franchise arrangements. In a franchise model, an individual receives the right to sell the chain’s products or services in exchange for a franchise fee — typically a monthly payment calculated as a percentage of the branch’s revenue. When executed properly, a franchise agreement represents a mutually beneficial opportunity: the franchisor enjoys a steady income stream without the burden of managing individual branches, while the franchisee gains access to an established business with a proven track record. However, to ensure that both parties truly benefit from the arrangement, comprehensive legal support is essential — from evaluating the feasibility of the transaction through negotiating the terms and drafting the agreement itself.

Is Franchising Worth It?

Franchising offers several notable advantages. It allows the franchisee to launch an independent business in a relatively short time without building a brand from scratch. Instead, the franchisee receives an established, proven product or service, along with the benefit of an existing business reputation and recognized trademark. However, franchising also has its drawbacks. Under the franchise agreement, the franchisee must operate according to the franchisor’s requirements, which limits operational independence and discretion in managing the business. Additionally, the cost of a franchise can be substantial — typically involving an upfront financial guarantee to secure obligations under the agreement, as well as ongoing monthly royalty payments calculated as a percentage of revenue.

Key Elements of a Franchise Agreement

A well-drafted franchise agreement must address several critical elements to protect the interests of both parties. The agreement should clearly define the scope of the franchise, the territory in which the franchisee may operate, the intellectual property rights being licensed, and the obligations of each party. It should also include provisions regarding dispute resolution, confidentiality, and what happens when the agreement expires or is terminated. Because franchise agreements tend to be complex and heavily weighted in favor of the franchisor, it is essential for the franchisee to have experienced legal counsel review and negotiate the terms before signing.

Critical Clauses: Duration, Fees, and Operational Standards

While a franchise agreement is comprehensive, three key clauses deserve particular attention:

Duration and termination: Franchise agreements are signed for a limited period, typically with an option to renew. The contract term should suit both parties, and it is crucial that the agreement includes provisions for early termination beyond standard breach-of-contract scenarios. The franchisee may need an exit option in cases of insufficient profitability or inadequate support from the franchisor. Similarly, the franchisor needs protection against reputational damage caused by a poorly performing franchisee.
Franchise fee: The franchise fee is the ongoing payment the franchisee makes to the franchisor, usually calculated as a percentage of revenue. Both the payment amount and calculation method should be clearly defined and carefully negotiated.
Operational requirements: The franchisor typically imposes standards regarding product quality, store appearance, marketing practices, and customer service. These requirements protect the brand’s consistency but also limit the franchisee’s operational independence, making it essential to understand and negotiate these terms thoroughly before signing.

Franchisor Requirements and Franchisee Obligations

As noted above, while the franchisee is technically an independent business owner, the franchise model requires adherence to the franchisor’s operational rules and standards. The franchise agreement must clearly spell out exactly what the franchisor requires of the franchisee, so the franchisee can make an informed decision about whether the arrangement is financially viable. Clear documentation of these requirements also helps prevent disputes between the parties. Among the issues that should be addressed are branch operating hours, staffing levels, product sales policies and promotions, employee training, non-competition obligations, confidentiality requirements, and more.

Mor & Co. — Franchise Agreement Legal Support

If you own a business and are considering expanding through a franchise model, we invite you to schedule a consultation to explore all the options available to protect your brand and your interests. Our firm has extensive experience in all aspects of franchise law.

Mor & Co. Law Firm’s Commercial Law Department has extensive experience representing entrepreneurs, businesses, and corporations from Israel and abroad across a wide range of legal areas, including franchise agreements and commercial transactions. Contact us by phone at 02-595-3322, via WhatsApp at 050-441-1343, or through the online contact form below.