Franchise Agreements – The basics

It is important to get a basic understanding of a franchise to confirm it is right for you. it is commonly used to describe a business relationship for distributing or licensing a model between one party and another. The model is usually a tried and tested business which has had some success or prospect of success in the future if a particular framework is used.

There will be a franchisor which is the person with the business who is allowing another party to carry the torch and ‘license’ it (note that this is not an exclusive license), and then there is the franchisee which is the person that pays for the privilege. There may be many franchisees across a wide reach such as McDonald’s that has outlets all across the world. It is important to note that the franchisee runs its business independently as its own. The key elements for a franchise to be considered as active are the name of the branded business is associated; there are payments which are agreed to be paid to the franchisor; and there is always to be a certain standard which is expected from the franchisee and this standard will have frequent quality checks to satisfy this on behalf of the franchisor.

A franchise agreement will be used to ensure that both parties know where they stand. There will be different assurances that each party will want from the other and the negotiations can be tiresome. Ultimately, if the franchise is good and sought after, then it will be the franchisor that has a better bargaining chip. It will want to ensure that the correct fee is paid but at the same time it will want longevity to maximise its earnings from the franchisee so will wish for it to be fair and proportionate. It will also wish for there to be a higher level of confidentiality agreed to protect its business model and any particular knowhow about the operations of the business.

The franchisee however will be wanting to confirm that there is the correct amount of support to ensure the smooth operation of the business. A considerable amount of money will be exchanged in this agreement as a down payment so the franchisee will need to know that it is able to hit the ground running. The other consideration that the franchisee will be wishing to ensure within any agreement is performance levels are accurate and not misrepresented. It is important not to allow yourself to be blind sighted into agreeing to a franchise so ensure you get professional advice on this before agreeing to anything. This could be from an accountant that can look over performance of the franchisor’s business in previous years.

Any agreement will be long winded and seem overwhelming and excessive, however it is important to use a legal representative that can look over the agreement in detail and advise you accordingly. We have a specialist team who can draft and advise clients on franchise agreements. Do not hesitate to contact us for more information, whether you are a franchisor or a franchisee.

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