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Whether you are an aspiring entrepreneur or a seasoned business owner, franchising can be an exciting opportunity to expand your brand and reach new customers. If you are considering franchising your business, the franchise agreement is one of the fundamental documents you must prepare and provide to prospective franchisees. This article will explain franchise agreements and the content you typically find within them.
This handbook covers all the essential topics you need to know about franchising your business.
What is a Franchise Agreement?
The franchise agreement is a legal contract. It establishes an individual or a business entity as a franchisee. Once signed, there may be legal consequences if you or the franchisee fail to comply with its terms.
These documents are usually lengthy as they contain a lot of information. Typically, franchise agreements:
- provide the franchisee with the rights to operate using the intellectual property, products, services, and operating systems of your franchised business;
- outline the rights and obligations of you and the franchisee;
- form the basis of your working relationship;
- outline the program of training and ongoing support you will provide; and
- have a limited duration and include the conditions under which you or the franchisee may terminate the agreement.
The franchise agreement is not only a legal document but a strategic step in building a successful franchise system. Consider the values and integrity of your franchise, and think about how the agreement aligns with your long-term business goals.
Contents of the Agreement
The specifics of the contract can vary depending on your franchise and the terms you negotiate. In the UK, there is no standard form for the document. The following table covers some essential elements franchisors must include within franchise agreements.
| Operating standards | Clearly define the operating standards expected within a unit. Including this in a legally binding contract ensures that you protect your brand and customer experience while explaining your expectations to franchisees. |
| Responsibilities | Set out the roles and responsibilities of both the franchisor and franchisee, including: • the provision of support and training; • involvement in marketing and advertising; and • detail about the distribution of products. |
| Territory and location | Provide information about the franchise territory, any restrictions, and whether the franchisee has exclusive rights within this area. |
| Intellectual property | Franchisees’ use of the franchised business’ intellectual property is a core principle of franchising. This involves providing franchisees with your business’ name, branding, and trademarks. The franchise agreement will define the intellectual property the franchisee is allowed to use. Ensure your franchise agreement carefully outlines when and how the franchisee can use your intellectual property. If you want to restrict the franchisee’s rights of use, include those restrictions in the franchise agreement. It is key to safeguard your intellectual property within this section of the agreement. |
| Fees | The franchisee will pay you an initial fee and then ongoing payments. You will detail the structure for these payments within the agreement. If franchisees will incur additional fees, such as marketing costs, you should also detail those. |
| Term, renewal, and termination | Clearly define the duration of the agreement and include the terms and the procedures for renewal and termination. |
| Conflict resolution | Outline the procedure for conflict resolution should a dispute arise within the franchise. |
How Do I Prepare a Franchise Agreement?
To create a franchise agreement, you should first prepare a draft. You can seek legal guidance from an experienced franchise lawyer who can help with this process. A lawyer can also produce the draft for you or review one you have already created. When fully drafted, you will provide the prospective franchisee with the document. After reading, they may want to negotiate the terms with you, and a solicitor can also help with this. Once signed, the agreement is in place and is contractually binding.
Key Takeaways
A franchise agreement is a legally binding contract that outlines the franchisee-franchisor relationship. It encompasses aspects such as rights, obligations, intellectual property, fees, and mechanisms for conflict resolution. A well-written and soundly structured franchise agreement is a crucial foundation for a successful franchise system. Seek legal guidance to create, review, and negotiate the agreement if you feel you need it.
If you would like help preparing franchise agreements or legal advice about franchising, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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