After a lengthy process of research and recruitment, the time will come for franchisor and franchisee to sign a franchise agreement. This type of agreement is legally binding and absolutely necessary. It protects the rights of both parties, and safeguards the business that the franchisor has built.
For franchisors, finding a new franchisee is an exciting process, and signifies good things to come. That said, franchising doesn’t come without risks. Finding the right franchisee is key, and recruiting the wrong franchisee can be disastrous. A franchise agreement sets standards that protect both parties, allowing everyone involved to move forwards with peace of mind.
What is a franchise agreement?
A franchise agreement is a legally binding document, signed by franchisor and franchisee. The agreement includes guidelines, stipulations and rules that both parties must follow, and the signing of the document signifies the legal beginning of a franchising relationship between the parties.
Just like a marriage, a franchise relationship between a franchisor and a franchisee works out great if both parties are satisfied and happy. And an effective way to ensure this is to draft, finalize, and settle with a franchise legal agreement that is both fair and firm.
What does a franchise agreement entail?
A franchise agreement isn’t one size fits all, and every agreement will differ, as they’re tailor-made to fit each individual franchise. That said, all agreements should include the following as standard:
- Personal information (of both parties)
- The duration of the agreement
- Details of renewal rights
- Details regarding the franchisee’s right to sell
- The fees involved (initial investment costs, royalties, operational costs, marketing costs, any other monthly fees)
- Marketing guidelines, set by the franchisor
- Operational requirements, laid out by the franchisor
- Legal requirements
- Guidelines which will apply in the event of death or illness
- Breach conditions and termination details, including any obligations and restrictions which would be applied to the franchisee after termination (e.g not working for a competing brand for two years post-termination)
- The franchisee’s location/territory (if applicable - some franchises are home-based)
- The franchisor’s training and ongoing support plan
- The trademark usage guidelines, as determined by the franchisor
Before signing the franchise agreement or heading into negotiations regarding the contents of the contract, it’s recommended that both parties seek legal advice.
Why is a franchise agreement important?
In 2018, the franchising industry contributed £15 billion to the UK economy [British Franchise Association]. It’s a huge, growing sector, and more business owners are turning to franchising in order to facilitate the expansion of their company. As franchisors and franchisees alike venture into the industry, legal rights must be protected, and legal guidelines must be followed.
You might be wondering: Who does the franchise agreement favour? The answer is the franchisor, and there's a good reason. The franchisor has more to lose, and more to protect. Without a franchise agreement, a franchisor faces considerable professional and financial risk. If a franchisee underperforms or breaks the law in their role, this will negatively impact the entire business. If a franchisee provides poor customer service, their actions will impact how customers view the entire brand.
The franchise agreement is absolutely crucial, because it explicitly lays down the obligations required of both parties and leaves no room for guess work.
Perhaps no other single part of the franchise development process is as important to the ultimate success of the franchise system as is the franchise agreement.
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Four ways the franchise agreement protects franchisors
Here are four key ways in which the franchise agreement protects franchisors:
1. Brand protection
The franchise agreement allows franchisors to protect, first and foremost, the brand that they have built over the years. Often, branding is one of the most valuable assets that a company has, and should be protected accordingly.
Within the franchise agreement, specifications will be made about how a franchisee can use and market the brand, including which trademarks, logos and signage are on offer to them. As a franchisor, if a franchisee breaks your terms surrounding trademarking and marketing, you’ll potentially have grounds for termination, as they will have committed a breach.
>> Read more:
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2. Control over quality of customer service
This ties into the value of a brand. Brand reputation is absolutely vital for success, but brand reputation can be easily damaged by the actions of even a single franchisee. After a single negative experience with a company, 51% of people surveyed said that they would never do business with that company again [New Voice Media].
The franchise agreement allows the franchisor to set quality control guidelines for customer service. If a franchisee isn’t meeting these guidelines, a franchisor can then pull them up on it, and request that service improvements be made. If service continues to be of a low standard, the franchisor will be able to terminate the contract, and the franchisee’s negative impact on the brand’s reputation will be minimised.
3. Control over products/services offered
Franchisors want their customers to walk into any franchise with the confidence that they’ll receive the same product/service, at the same quality, no matter the location. For example, business owners at the head of food franchises will often include terms within their franchise agreements that stipulate where ingredients should be sourced from, which items should be on the menu, etc.
4. Termination/Breach options
As mentioned throughout, the franchisor has the ultimate ability to end the franchise contract, either by not renewing it at the end of the term, or by terminating it early. The franchisor is able to do this when a breach has been committed by the franchisee, limiting the damage the company sustains as a result.
Some breaches will be grounds for immediate termination, such as breaking the law or declaring bankruptcy. Other breaches will require communication and due process. The ability to end a franchise agreement gracefully at contract renewal time protects the franchisor from having to continue in business with a franchisee that has fallen short of the terms of their agreement.
A solidly constructed franchise agreement marks the beginning of a successful enterprise
A fair and well-constructed franchise agreement is the best move for both parties, whether you’re a franchisor or a franchisee. When expectations are clearly named, it’s much easier to meet them, and a positive working relationship can grow and develop with time.
Although the franchise agreement is designed, in many ways, to protect franchisors, it still offers multiple legal protections to franchisees. Beyond the value of having expectations stated in writing, the franchise agreement prevents unfair dismissals and outlines promises that the franchisor must keep, too, regarding training and ongoing support.
Franchisors and franchisees alike can learn and grow from the tips and tricks contained within Point Franchise’s wide range of articles.
Cara Squires, Point Franchise ©