What is a franchise agreement?
A franchise agreement is a business contract that sets out the terms and conditions of the relationship between the franchisor and franchisee.
As a franchisor, it’s a key component of handing over the rights to use your business model. It will explain a franchisee’s responsibilities and obligations, such as using the brand’s products and services, how the business should operate, restrictions on advertising, training that will be delivered and more.
If you’re a potential franchisee, it’s essential that you review any draft agreement carefully so that you know what is expected from you during agreed period of the franchise relationship. Equally, franchisors should be clear on what they expect to protect their brand and reputation. We would always recommend that you take legal advice from a solicitor on any franchise agreement before you sign it, because this document is absolutely critical to the future of your business.
Why a franchise agreement is important
What should a franchise agreement include? This depends on your specific circumstances. When it comes to reviewing the agreement, there are key aspects that you’ll need to consider before signing on the dotted line.
Here are just a few reasons why having a franchise agreement is beneficial for all parties involved.
Clear responsibilities
As the agreement outlines what’s expected for each party, there is an understanding of what is expected, and what the conditions of a franchise agreement are. This is particularly important should anything go wrong, as it will cover the termination of the franchise relationship and breach of contract.
Provides consistency
When a customer visits your premises or make a purchase, they expect the same standards from the franchisee as they would the original business. Agreements may detail the processes that should be followed, for example.
Minimise risk
Whether it’s a dispute or non-compliance, having an agreement in place offers a route for dealing with any potential issues as each party has obligations to fulfil. It also protects the intellectual property of the franchisor.
Clarity on the numbers
From payments to fees, an agreement means it’s clear what’s involved when it comes to money. For example, are fees at an ongoing rate, or as a percentage of revenue? This information is vital for managing cash flow as a franchisor and franchisee.
Exiting the franchise
If either party wants to leave the agreement, or the agreement expires, it will include details about what should happen in this instance.
Franchising agreement vs. licensing agreement – what's the difference?
Whilst both business agreements involve one business granting rights to another, there are important differences, such as:
- A license is limited to specific intellectual property (for example registered trademarks, patents, copyrighted works, designs etc) whereas a franchise agreement covers an entire business’ brand and operations. For example, your business might have a licence to use a recognisable brand on products.
- A licensee will have more control over their business, as the licence applies to the relevant intellectual property, not the business. A franchisee will have more restrictions, but also guidance on how the business should be run.
- Different amount of control. A franchisor can control like marketing and operations, whereas a licensor can only control how the relevant intellectual property is used.
How long do franchise agreements typically last for?
The length of the agreement will be included in the agreement, common durations can be anywhere between five and 20 years. It’s important to check this in the agreement to avoid any issues later down the line.
How do I set up a franchise agreement?
All franchises and all businesses are different. As such we always recommend that before embarking upon franchsising your business you should take specific advice from a solicitor, and have a bespoke franchisee agreement drafted to suit your purposes. Hopefully your franchise model will be be successful, and as such, it will need to be replicated again and again. As such it’s vital you get everything correct right from the outset.