What is a Franchise Agreement? Franchising Explained

Looking to invest in a UK franchise? The franchise agreement plays an important role, find out what it is and how it affects the franchise.

Legal Law

What is a Franchise Agreement? Franchising Explained

If you’re looking to get into business ownership, there are several routes you can choose. One way is to set up a business yourself. Independent business ownership gives you complete control, but it does come with many risks because you’re building from the ground up. But independent business ownership does have a lower success rate (79%) compared to other routes such as franchising (93%). But what is franchising? And what is a franchise agreement?

What is Franchising?

There are several ways to get into business ownership. Independent start-ups, partnerships, buying an existing business and franchising. Franchising is where a business brand owner licenses out the rights to trade as that brand, to a third party. Along with this, for the investment, comes pretty much everything you need to launch the business.

The franchise “investment” is the money you pay to the franchisor (the brand owner), to receive a “business in a box” which consists of training, support, brand access and launch package. It is called an “investment” rather than a purchase because the business can later be sold and you make money back plus the value you build up over the years.

When you invest in a franchise and become a franchisee, there are many documents involved. One such example is a franchise agreement.

What is a Franchise Agreement?

The franchise agreement is a legal document which sets out the terms and conditions between the franchisee and the franchisor, throughout the duration of the contract. Franchising is a big step for both parties involved. For the franchisor, granting access to the franchisee to run the business and brand in their own area. Strong trust is placed in the franchisee because any issues can damage the reputation of the brand, for the entire franchise network. The franchisor needs to be sure that the franchisee is the right fit for the brand, the franchise agreement ensures the franchisee operates the business correctly. So because of this, the agreement tends to reference the franchise operations manual – another type of document associated with franchising, which outlines the correct running of the brand.

Franchise agreements tend to last any number of years, but often five. The franchisee will have the option to renew or cancel the agreement after this period.

The franchisor can be able to terminate the franchise agreement.

It is important to check through the franchise agreement with a lawyer. Generally you will get access to the franchise agreement after signing an NDA, but before you commit to investing. It is rare for a franchisor to terminate a franchise agreement, but there will usually be a clause or section within the agreement outlining the rights for both parties regarding termination of the agreement. This can happen for a number of reasons, for the franchisor to protect their brand, including:

  • Franchisee insolvency or not having sufficient capital to run the business
  • Incorrect information provided by the franchisee
  • Misconduct or breach of the franchise agreement

The whole idea of franchising is to grow a franchise network, increase brand awareness and help entrepreneurs get into business for themselves but not by themselves. So it is unusual for a franchisor to terminate an agreement, but it does happen.

What Does a Franchise Agreement Do?

The franchise agreement grants the franchisee the rights to trade as the franchisor’s trademark and business model. It is not uncommon for the agreement to heavily or mostly centre around the franchisee. Very little may actually govern the responsibilities of the franchisor, but it should still cover the responsibilities such as training and provision of support.

So what is included in a franchise agreement? Some elements may include:

  • The training and support the franchisee is entitled to, in exchange for the investment and any ongoing royalties involved
  • Details of any software or equipment provided to the franchisee
  • What the franchisee is expected to do, and what the franchisor is expected to do
  • Terms of termination of the franchise agreement
  • Exemptions from certain parts of the contract in scenarios such as force majeure

Franchisors cannot change the contents of the franchise agreement without first notifying and getting approval by all parties concerned. You should check the agreement for any statements which outline the rights of the franchisor when it comes to changing the agreement.

Franchise Agreement and Deposit Agreement Are Not The Same

Yet another type of agreement within franchising is a deposit agreement. Some franchises may not even have this. When investing in a franchise, you may be required to sign a franchise deposit agreement. Securing a territory sometimes requires you to place a deposit down, because when you choose to proceed with investing in a franchise, lots of work is invoked for the franchisor. Agreements between partners, arranging discovery days and interviews, for example. The deposit agreement will usually demand a date for the franchise investment to be paid by. The deposit may or may not be refundable. This will be outlined in the document.

A franchise agreement protects the franchisor’s intellectual property, whilst a deposit agreement is a document signed in the negotiation stages of franchising prior to investing.

Franchise Agreement Frequently Asked Questions

What is a Franchise Agreement?

A franchise agreement is a legal document setting out the rights and responsibilities of both the franchisor, the franchisee and any other parties involved. This includes rights to use the franchise’s partners, suppliers and brands. You should check over the agreement with a lawyer before signing.

Where can I get a franchise agreement template?

Both the franchise agreement and franchise operations manual are brand specific, so you should not use a generic franchise agreement template. If you take shortcuts by using franchising agreement templates, you will likely end up missing out critical information.

Can a franchise agreement be changed after signing?

A franchisor cannot change the contents of a franchise agreement after the franchisee has signed it. If changes are to be made, the franchisee must read, understand and approve these changes, signing again. The consent of all parties involved must accept the changes, and usually, changes will be negotiable. A franchise operations manual can be changed without notice, it is therefore important to understand how the agreement references the ops manual.

Why do we need a franchise agreement?

Franchising enables a streamlined and consistent approach to business expansion. All franchisees use the same brand, deliver the same services and share the same principals. It is the franchise agreement which guarantees this, the running of each franchisee against the methods set out in the operations manual, and how the franchisee can use the brand. We need a franchise agreement because without it, the stability of a franchise network would easily crumble.

Who creates the franchise agreement?

The franchisor should work with a franchise consultant and or legal specialist to create the franchise agreement. The brand owner isn’t expected (and likely won’t) know everything about what to include in a franchise agreement. When the franchise agreement is created, obviously the brand owner will be at a very early stage! Therefore using a consultant or lawyer is important to ensure every potential aspect is included. As mentioned above, an agreement cannot be changed once signed, without the franchisee’s approval!

Tips for Investing in a Franchise

Franchising is a big step forward, for both franchisor and franchisee. The franchisor is expanding their business placing their trust in the hands of the franchisee. Whilst the franchisee is getting into business ownership for themselves, but not by themselves. Franchises can be expensive but here are some fantastic tips.

Support is Available if you Need it

Even before you invest in a franchise, support is available. Many banks favour franchising as a safer route to business ownership. In fact many banks such as Barclays and NatWest have specialist franchise teams to help those looking to get into business ownership. A commonly quoted figure, many financial institutions can lend up to 70% of the total franchise investment. Repayable over a number of years, sometimes even the duration of the franchise agreement, this really helps those looking to set aside more of their own funds as working capital.

British Franchise Association Members Are Thoroughly Checked Out

The British Franchise Association was the UK’s first and is the most recognised franchising association in the UK. As part of their member requirements, franchising documentation such as ops manual and agreement are all thoroughly checked by a team of lawyers and consultants. This means that franchisees investing in a bfa-member franchise have greater levels of security. What’s more, the bfa is constantly growing, with many different franchise brands on board. If you’re looking to invest in a franchise, a big tip is to prioritise bfa members. Obviously not all big franchises are bfa members, but having this accreditation garners a “seal of approval” within the franchising sector.

Carry Out Due Diligence

Don’t rush into things. Franchising is a big commitment, but there are many ways to expand your understanding of franchising and what’s involved. Attend franchising events and exhibitions and use the many free resources available to you.

Franchise consultants are eager to help those looking to get into franchising. They won’t try to “sell” you a franchise, because importance of ensuring that a franchise is the right fit for both parties cannot be emphasised enough. Most franchise consultants will speak to you free to help you understand whatever you need to know.

Once you’ve taken time to have a look at franchising and the brands that interest you, be sure to speak with the franchisor, attend discovery days, explore the history of the brand and its franchisees and shortlist brands that you feel you can see yourself running.

Discover a World of Franchises at Franchise Planet

There are many free resources of franchising out there, and this website is one of them. Use a franchise directory such as Franchise Planet to discover the different types of franchises for sale out there. Business ownership isn’t necessarily expensive. With many franchise opportunities available for less than £10,000, business ownership via franchising could be more affordable than you think! Be sure to take your time, and make sure to read the franchise agreement.

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