What is a franchise agreement?

If you’re thinking about taking on a new franchise opportunity, the most important document you’ll encounter is the franchise agreement. Understanding what it contains and why it matters is essential before you commit.

What is a franchise agreement?

A franchise agreement is a detailed legal contract between a franchisor and a franchisee that sets out the terms of their relationship.

It forms the legal and operational foundation of the franchise relationship. While the agreement is essential for clarity and protection, it’s also a reflection of the commercial and personal relationship between franchisor and franchisee.

What information should the document include?

Franchise agreements usually cover the rights and obligations of both parties. Shelley Nadler, legal director at Bird & Bird, explains that a franchise agreement is “usually a largely non-negotiable, standard form contract that the franchisor uses for all of the franchisees in its network.”

Common provisions include:

● Franchisee rights, including territory (exclusive or non-exclusive) and use of intellectual property

● Term of the agreement and renewal options

● Franchisor obligations, including initial and ongoing support, training, advice, marketing assistance, and sometimes help with premises, stock, IT equipment or setup

● Franchisee obligations, including following the franchisor’s system, purchasing from specified suppliers, providing accounts and sales figures and maintaining insurance

● Financial obligations, including initial franchise fees, ongoing fees and contributions such as management service or advertising fees

● Rights to sell the franchise business, subject to conditions

● Termination clauses, including circumstances for ending the agreement and post-termination restrictions

Why do franchise agreements favour the franchisor?

Franchise agreements are generally non-negotiable and favour the franchisor. Vicky Wilkes, head of legal at Aston Villa Football Club, explains: “A franchisor will have spent considerable time and money in establishing and testing its franchise format.

“The franchisor therefore needs to protect its intellectual property and operating practices and must also ensure that the franchise concept is provided in a uniform way by all of its franchisees across the whole of its franchise estate.”

While this may feel one-sided, it ensures consistency across the franchise network and protects the brand for all franchisees.