What is a Franchise Agreement?

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Franchise agreement article

Youíve researched franchise ideas, chosen the right franchise for you and attended a discovery day. So, what happens next? Once youíve been accepted onto the franchise programme by the franchisor, you will need to sign the franchise agreement. Letís find out exactly what this important document is.

If youíre new to franchising, you might not be completely confident with what a franchise agreement consists of and why itís important. If this is the case, before you can even think about kickstarting or progressing with your franchising journey, you need to brush up on your knowledge. This article should iron out any uncertainties you have.

What is a franchise agreement?

The franchise agreement is a legally binding document between the franchisor and the franchisee. It outlines in legal terms how the franchisor-franchisee relationship works with respect to rights and obligations. It covers the provision of goods and services from the franchisor to the franchisee, payment terms, how long the agreement lasts for and what happens when itís time for renewal, the sale of established franchise units, expected practice with relation to the trademark and brand, any future adaptations to the franchise system and how to end an agreement.

Why is the franchise agreement important?

  1. It facilitates a mutually beneficial working relationship between the franchisor and the franchisee.
  2. By laying out the obligations of the franchisor and franchisee from the start of the relationship, while trading and if the contact is terminated, it helps protect both parties.
  3. If it has a lot of mistakes, it doesnít bode well for your future relationship with the franchisor and success as a franchisee. Scrutinise it in detail with a franchise lawyer and if there are any red flags, bring them up with the franchisor or consider forgetting the opportunity altogether.
  4. You are completely aware of your legal requirements. The franchise agreement outlines the legal relationship between the franchisee and franchisor, and covers the rights granted, terms of agreement and fees to be paid. You need to make sure that you are abiding by the law throughout your run as franchisee so you donít run into any trouble.

Donít have any regrets further down the line

Make sure youíre completely happy with the terms

It is simpler for franchisors to create a set of regulations that are applicable to each of their franchisees than develop an adapted version of the franchise agreement for every new recruit to the business. For this reason, franchisees should expect to be presented with a non-negotiable list of rights and obligations. Franchisors might expect investors who want to join the business to either accept all of these conditions without question or move on.

For this reason, prospective franchisees should carefully consider each and every aspect of the agreement to make sure that they understand their obligations before they sign on the dotted line. If the franchisor tells you the agreement is non-negotiable and it details something that you arenít sure about or donít feel you would be prepared to do, donít feel pressured into signing, as you may regret your decision further along the line.

Use resources provided by the BFA

The British Franchise Association (BFA) is the voice of ethical franchising in the UK and is the only voluntary self-regulatory body for the franchise sector. It suggests that the following areas are of significance when it comes to signing the franchise agreement: the costs, particularly any unexpected ones, personal guarantees, restrictions on your business activities and early termination of the contract. Head to its website for more tips that help ensure you have your own franchising success story in no time.

Seek guidance from a professional

Thereís no standard form for a franchise agreement and they can be difficult to interpret at times, so itís advised that you seek professional guidance from a specialist franchise solicitor who is affiliated with the British Franchise Association before you sign on the dotted line. You will be forced to comply with the standards outlined in the agreement for the duration of the contract period, so it is crucial that youíre aware of your legal position.

The list of obligations of the franchisee in the franchise agreement will be long and very specific. In fact, the entire agreement can be more than 40 pages long. This contrasts with the general obligations of the franchisor, which can be difficult to interpret. You must read each obligation in detail and ensure that, on a practical level, youíre able to fully comply. Also, an experienced franchise solicitor will know whether the franchise agreement details a typical franchise format and is compliant with the relevant code of ethics and UK law and, if appropriate, European law.

Refer back to the franchise agreement throughout your franchising term

If you and your solicitor are happy with the obligations, you will be able to adhere to them and ensure that the relationship between you and your franchisor is robust, which will set you on the path to commercial success.

However, you should remember that while a lot of your time will be taken up with reading and considering the franchise agreement in the initial stages of the franchise process, it is a document that is created with the purpose of maintaining the smooth running of your business over the entire contract term. Therefore, you should frequently refer to it to refresh your memory of your obligations.

Also, you could use the agreement to settle any disputes that crop up or to work out the best way to terminate the franchise agreement, should you ever decide to move on. In short, the agreement is there for you throughout your franchising journey and should be consulted regularly.

Franchise agreements are crucial documents

By now, you should have a fuller understanding of what a franchise agreement is and why it is so essential in the franchising world. We also advise reading another one of our articles that covers 10 things you must know about franchise agreements.

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