A franchise agreement is a contract that sets out in detail how a franchise will be dealt with by the franchisor and the person taking on the franchise, the franchisee. We look at what you need to be aware of before signing this type of contract and answer the question, what is a franchise agreement?
What is a Franchise?
Franchising is a business model that allows an individual to take on a branch of an established business. They will have an element of support from the business owner but also the freedom to run their own operation. Examples of well-known franchises include Costa Coffee, Pizza Hut and Swarovski.
The franchisor will provide a structure that could include shopfitting, products, trademarks and advertising materials. They may have a system in place that the franchisee is required to follow when running their branch.
The franchisor will make certain undertakings, such as not offering other franchises within a certain geographical area and providing training to the franchisee and their staff.
So, What is a Franchise Agreement?
The franchise agreement is a roadmap for the operation of the franchise. It should set out exactly what is expected of each party as well as any restrictions, obligations and undertakings.
It is essential to have a bespoke franchise agreement that has been drafted for the business in question and that provides a solid legal foundation for the relationship between the franchisor and the franchisee.
This will go a long way to avoiding misunderstandings or disagreements in the future.
Who Prepares a Franchise Agreement?
It is for the franchisor’s legal team to prepare the franchise agreement. If you ask us to represent you, we will work closely with you to understand your business needs and how you want your franchise to work.
We will draft a comprehensive franchise agreement that offers the protection you and your brand need but that gives the franchisee the flexibility to make a success of their operation.
What Key Clauses Go in a Franchise Agreement?
A franchise agreement will include a wide range of clauses which aim to provide a framework for the relationship between the parties. Key clauses in franchise agreements include:
Length of the Agreement
The terms of the agreement should be included. This will generally be between five and ten years. The agreement can include the option to renew the agreement and the process for doing this. Franchise agreements are commonly granted for five years, with the right to renew twice so that a franchisee can take on the business for fifteen years.
Payments
A franchisee will be expected to make a range of payments. There will be an initial franchise fee payable to the franchisor for buying the franchise. During the term of the franchise, the franchisee will usually be expected to make other payments such as royalties. This could be on a turnover or profits basis. They will also be required to purchase of stock and potentially other items such as marketing materials.
The franchisor may charge for training if this is provided.
It is essential that costs are dealt with clearly in the agreement, including when they arise, how they will be calculated, when payments must be made and what will happen if there are arrears.
Territory
The agreement should state what area the franchisee has the right to operate in and any restrictions on the franchisor preventing them from offering another franchise nearby. For a business to be successful, it will be important for the franchisee to have a large enough area in which to operate exclusively.
From the franchisor’s point of view, they will not want to give too wide a territory to one operator as this could limit their market.
Rights and Obligations
Franchisors can choose whether the franchise will be in the same model as the main business or whether the franchisee has some discretion to deal with certain aspects of the operation in the way that they want.
The agreement should detail exactly what is expected of each party, including:
- What the franchisor will provide
- How the franchisee can operate
- Any restrictions on each
- Reference to any business handbooks that must be followed, for example, staff employee handbooks and health and safety manuals
- Any processes that the franchisor requires the franchisee to follow, such as the hiring process
- How administration and reporting will be dealt with
Marketing
The franchisee needs to know what is expected of them with respect to marketing. They may have some freedom to choose how they go about this or the franchisor may provide materials and directions for the type of marketing they require.
In some cases, the franchisor may do the bulk of the marketing, particularly with large national brands.
Intellectual Property
The franchisor will want to protect their intellectual property and the agreement should set out the extent of permitted use and how the brand will be protected.
Sale of the Franchise
The agreement may permit the franchisee to sell on the franchise. It will specify the process for doing this, as the franchisor will want to vet and approve any new franchisee. It is open to the franchisor to stipulate that they will find their own new franchisee.
A fee will usually be payable to the franchisor for any onward sale.
Ending the Franchise Agreement
If it is possible for either party to terminate a franchise, they must follow the process set out in the agreement. This will include notice periods and obligations on each party, including restrictive covenants preventing the franchisee from using anything they have learned while operating the business to their own advantage.
Personal Guarantees in Franchising
A franchisor will usually require the franchisee to provide a personal guarantee. Even if the franchisee is a company, the franchisor can require a company director to provide a personal guarantee.
If the franchise agreement is breached in any way and there is a loss, then the franchisor could pursue any individual who has provided a guarantee.
What Should You Do if You are Given a Franchise Agreement to Sign?
It is essential to take advice from an expert franchise solicitor before signing a franchise agreement. Our franchise lawyers have experience across a wide range of franchising models.
We can advise you on the terms and conditions and where necessary, take steps to limit your liability. We will ensure that you have a full understanding of the implications of the agreement and that it is in your best interests to sign.
For more information about our services, see our franchise solicitors page.
Contact Our Franchise Agreement Solicitors
We work with businesses to provide robust franchise agreements as well as advising franchisees on franchise opportunities.
To speak to one of our expert franchise law solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help. We have offices in Birmingham, Northampton, London and Wellingborough.
