One of the key elements of franchising is the franchise agreement. This will provide the framework for a franchisee’s business and experience with the franchisor. And so what is a franchise agreement?
It is a contract between a franchisor and franchisee. It outlines the terms and conditions under which the franchisee can operate a business using the franchisor’s brand, trade name, operational processes & proprietary knowledge. The agreement will specify the rights & obligations of both the franchisee and the franchisor so that both parties are clear about what they are required to do.
What’s included in a franchise agreement?
Key components of a franchise agreement typically include:
- Franchise Fee: The upfront cost paid by the franchisee to the franchisor for the rights to use the franchise’s brand & business model
- Royalty Payments: Ongoing fees that the franchisee must pay to the franchisor, usually calculated as a percentage of gross sales. The agreement will specify the terms of payment
- Territory: The geographic area in which the franchisee can operate. The franchise agreement often includes terms regarding exclusivity within this area
- Term and Renewal: The length of time the franchise agreement is valid & the conditions under which it can be renewed
- Training and Support: Details about the level of training, marketing support & other assistance the franchisor will provide
- Quality Control: Requirements for maintaining the franchisor’s standards for products, services operations
- Brand Guidelines: Rules for using the franchisor’s trademarks, logos & other brand elements
- Termination: Conditions under which the franchise agreement can be terminated by either party
The franchise agreement will typically have been created by the franchisor in order that they can maintain a smooth-running & successful business with the help of many franchisees. It’s therefore important for new franchisees to know what’s in the agreement & to get legal advice before signing it.
While a lot of your time will be taken up with reading the franchise agreement in the initial stages of the franchise process, the hope is that it will have been created to make the business of the franchisee simple & that it won’t be something that the need to stress over constantly. That said, as it is created with the purpose of maintaining the smooth running of the franchisee’s business over the entire contract term, it makes sense for them to reread it periodically & refresh their memory of their obligations.
What is the importance of a franchise agreement?
The agreement is important because it will provide the foundation for a new franchisee’s relationship with their franchisor & dictate how they are able to run their business. If it’s right, it will simplify what the franchisee has to do in order to succeed. If it’s poorly thought-out or if it’s not been tried before, it can have unforeseen consequences.
Having a clear agreement from the outset can be extremely helpful for people in business: they know what their responsibilities are. This is often a point of friction in business as when people start their own businesses with others, they are unlikely to have thought through many of the long-term consequences of the business. Sometimes this leads to business relationships falling apart & business partners falling out.
Belvoir Group has used and refined our franchise agreement over decades & over the experience of hundreds of franchises. The advantage for franchisees choosing us is that they use a franchise agreement that works with hundreds of other franchisees and that has been designed to work well.
What is required for a franchise agreement?
In order for you to get to the stage where you can sign a franchise agreement, there are a few things that will typically happen. The first is that you will be asked to sign a non-disclosure agreement. This will protect the franchisor as they will be sharing with you their methods of working & documentation before you sign the franchise agreement.
How does a franchise agreement work?
A franchise agreement works as a legally binding contract that outlines the operational relationship between a franchisor (the entity that owns the rights to a company’s name or trademark) and the franchisee (the person or company that is authorized to sell or distribute its goods or services).
Here are the general steps for how a franchise agreement works:
- Selection: A potential franchisee shows interest in a franchisor’s brand. The franchisor evaluates the franchisee’s suitability based on a variety of factors, such as financial stability, business acumen, and alignment with the brand’s values
- Disclosure: If the franchisor determines the potential franchisee is a good fit, they provide a Franchise Disclosure Document (FDD). This document provides detailed information about the franchise, including its financials, legal history, and existing franchisees. The potential franchisee reviews this document carefully, often with the assistance of a lawyer or consultant.
- Negotiation: The franchisor and potential franchisee negotiate the terms of the franchise agreement. This might include the length of the agreement, the geographic territory, the fees to be paid, and the support to be provided by the franchisor
- Signing: Once both parties agree to the terms, they sign the franchise agreement, and the franchisee pays the initial franchise fee. The agreement becomes a legally binding contract.
- Training & Support: The franchisor provides training to the franchisee on how to run the business. This might include training on the company’s operating systems, marketing strategies & product preparation, among other things. The franchisor also provides ongoing support throughout the term of the agreement
- Operation: The franchisee runs the business according to the terms outlined in the franchise agreement (in addition to the franchisor’s operations manual which sets out their required process and gives advice on frequently occurring situations). They typically pay ongoing fees to the franchisor, including royalty fees and possibly marketing fees.
- Evaluation & Termination or Renewal: At the end of the agreement’s term, both parties evaluate the relationship. If both are satisfied, they may choose to renew the agreement under the same or modified terms. If not, they can part ways or, in some situations, the agreement can be terminated early under certain conditions.
What are the benefits of a franchise agreement?
Franchise agreements clearly set out the obligations required of both parties to avoid disputes and any doubts as to each party’s obligations. They provide the mutual trust between franchise owners and franchisees that will enable the enterprise to happen. There are benefits on both sides of the agreement. Some of these are outlined below:
What are the benefits of a franchise agreement to the franchisee?
- Protecting the interests of the franchisee: Just as there are terms included in the franchise agreement that protect and benefit the franchisor, there are also terms that protect the franchisee.
- Outlining what the franchisee is entitled to: The agreement will detail the different services and support the franchisor must provide to the franchisee. For instance, nearly all franchise agreements will specify how goods and services are supplied, what training the franchisee and their staff will receive & which additional management and support services they will be entitled to
- Who is responsible for what: The franchise agreement will specify who has responsibility for marketing and advertising, who provides the initial stock/equipment for your business & what assistance the franchisee can expect when they start to run their business
What are the benefits of a franchise agreement to the franchisor?
- Protecting their interests: Part of the purpose of the agreement is to protect the franchisor. After all, the franchisor will be wanting to ensure that they can build a successful franchise business with multiple franchisees who collectively enhance their brand.
- To guard against underperforming franchisees: Franchisors will want to monitor the performance of franchisees. They will want to give franchisees support & training in order to ensure that they perform but, if the franchisee doesn’t they will want to provide support to remedy any shortcomings and help the franchisee achieve their objectives and ultimately the franchisor reserves the right to take action if they continue to fall below a minimum threshold
- Protecting intellectual property: The franchisor will also use the franchise agreement to protect themselves from unfair competition and to ensure the integrity of their intellectual property which they continue to develop for the greater good of the business and for the ongoing benefit of the franchisees
How long does a franchise agreement last?
The duration of a franchise agreement can vary significantly depending on the franchisor and the specific terms of the agreement. However, a typical franchise agreement generally lasts between 5 and 20 years.
It’s worth noting that the agreement will usually include terms regarding renewal. The franchisee may have the option to renew the agreement for additional terms if they meet certain requirements. These requirements might include maintaining certain sales levels, paying all fees on time, and complying with all other terms of the original agreement.
In some cases, there may be additional fees associated with renewing the franchise agreement. As with all other aspects of a franchise agreement, the length of the term and the terms of renewal should be carefully reviewed and understood before the agreement is signed.
Under what conditions can the franchisor terminate the franchise agreement?
Franchisor-initiated termination of a franchise agreement can occur under several circumstances, though the exact conditions will vary based on the specific agreement. However, some of the most common reasons include:
- Breach of Agreement: If the franchisee fails to comply with any terms or conditions stipulated in the franchise agreement, the franchisor may have grounds for termination. This could include failure to meet operational standards, not paying fees or royalties, or violation of territory rights, among others.
- Insolvency or Bankruptcy: If the franchisee becomes insolvent or declares bankruptcy, the franchisor may terminate the agreement.
- Misrepresentation or Fraud: If the franchisee has misrepresented important information or committed fraud in their dealings with the franchisor or in the operation of the franchise, the franchisor may have grounds for termination.
- Damage to Brand Reputation: If the franchisee’s actions are damaging the reputation of the brand, this can be grounds for termination. This could be due to poor customer service, inferior product quality, or any scandalous behaviour, for instance.
- Non-Renewal: If the franchisee does not renew the agreement after its term ends, the franchisor can terminate the relationship.
- Illegal Activity: If the franchisee is found to be conducting illegal activities in the operation of the franchise, the franchisor can terminate the agreement immediately.
In most cases, the franchise agreement will specify a notice period and a chance for the franchisee to correct their breach (known as “cure period”) before termination. However, some serious offences might lead to immediate termination.
As termination conditions can significantly impact the franchisee’s business, it’s crucial for prospective franchisees to thoroughly understand these terms before entering into an agreement. Similarly, franchisors must ensure they follow the correct legal procedures when terminating a contract to avoid potential legal repercussions.
A good franchisor will go to considerable lengths to remedy a breach before taking termination measures: they will want to work with you as working together with others is what their business model is built upon.
In summary: Why do you need a franchise agreement?
A franchise agreement is put in place to ensure that both the franchisor and the franchisee are protected throughout the agreement. It’s an important document and helps you to lay out your legal requirements, putting you in good stead to understand what happens in various scenarios, such as if you were to terminate the contract whilst trading. Not only this, but as the agreement details so much about your franchise journey, it helps you to understand what to expect, and what is expected. Keep in mind that it’s crucial that you continue to follow the law outlined within the agreement throughout your journey as a franchisee.
It’s definitely advisable for this document to be read thoroughly, and it must be understood. Consult a legal counsel to take you through the agreement, as you want to ensure that you’re happy with everything and fully informed.
How we can help
If you’re considering starting your franchisee journey, a Discovery Day is where it all starts with the Belvoir Group. You can immerse yourself in what it means to be a sales and lettings franchisee with us, and we can learn a little more about you. Then, you can take your next steps.
If you have any questions about franchise fees or if you are interested in learning more about becoming a property franchisee & starting an estate agent franchise, please take a look at our Become a Franchisee page.