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The franchise agreement explained: everything franchisees and investors need to know
How does a franchise agreement work in the UK? How long do franchise agreements last? Here’s what you should know before you sign a franchise contract.
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Did you know there are almost six million small businesses in the UK? Do you spend all day in a cubicle dreaming of joining their ranks and starting a business of your own? If so, then opening a franchise can be a great way to shortcut the process and start a business you know has already been successful elsewhere around the country.
When you start researching your new franchise opportunity you will want to study a brand’s franchise agreement. Don’t worry if you don’t know what that is; we’ve got you covered. Keep reading to learn everything you need to know about franchise agreements and how they will help guide you in starting your new business successfully.
What is a franchise agreement?
The franchise agreement is your contract with the franchisor. It outlines the terms and conditions both parties agree to about the franchised business. As a general rule, the agreement will outline how the potential franchisee will run the business. It will also generally outline certain parameters within which the franchisee needs to adhere to when operating the franchise.
A prospective franchisee may seek legal advice before signing the franchising agreement.
In the agreement, each party understands their roles and expectations as outlined in the document. The franchisor is the owner of the brand and will retain control over how that brand is disseminated and represented throughout the various locations. The franchisee is the contractor purchasing the right to use the brand to run their business.
To maintain quality control and uniformity throughout the franchise network across the country, franchisors will set certain expectations. Every franchisee will need to abide by these expectations while they run their business. The agreement ensures that both parties understand the agreements and will abide by them.
The franchisee is generally given the ability to make decisions about the day-to-day operations of the business. Yet, the franchisor provides the branding to keep its brand uniform throughout their various locations.
However, certain branding will be provided by the franchisor in order to keep their brand uniform throughout their various locations. The franchisee will pay predetermined fees to obtain the rights to the intellectual property such as branding, logos, operations manuals, trademarks and patents.
Why you need a franchise agreement
Starting your business can be both exciting and scary at the same time. But if you jump into a new business without the protection of a contract, you might find yourself in a nightmare-like situation.
With the franchise agreement, both parties have full transparency and integrity regarding operating the business. It also outlines the obligations and limitations of each party in the agreement. A successful agreement will allow both sides to know what they can expect from the other and from themselves.
When you start a new business you might have several questions, or, you might not know where to start. By purchasing a franchise, many of your questions are answered for you. However, many more questions might be brought about.
A good agreement will outline what you can expect and what is expected of you. This is why an agreement is so important to you as a new business owner.
How does a franchise agreement work in the UK?
The franchising model has been popular in the UK since the 1800s when brewers would give financial support to pubs who exclusively sold their products. Today, the franchising model is still alive and thriving all across the UK giving business owners everywhere a successful model to follow.
Franchising offers stability and a known roadmap to follow for starting your business. Franchise agreements give a contractual outline so every party knows what their obligations are. There isn’t any government body that regulates the franchising industry so, as a franchise owner, it is imperative that you fully understand the agreement before you sign it.
Elements of a franchise agreement
As a contract, there are several elements you can expect to see in each franchise agreement. There are four main elements you should expect to see in any legitimate agreement. These include:
- The fees required
- The length of the contract
- The level of exclusivity to expect
- The exit plan
We will look at each of these elements as well as why they’re important and what happens if you break the agreement in the rest of the article. If you have any questions about these elements, you should consult a franchise solicitor to explain it to you.
How much money do you need to buy a franchise?
Generally, the fees required are usually three-fold. First, is the initial investment and you can usually expect to also pay a continuing fee for the right to use their intellectual property as outlined above.
The initial fee varies wildly depending on the size of the franchise as well as how exclusive your rights will be in your area. You might be able to find a franchise with an initial fee as low as £10,000. While other franchises can demand as much as £5,000,000.
Additionally, there will be ongoing fees in terms of continuing royalty fees which are usually eight per cent of your sales, along with marketing fees which are generally two per cent of your sales. Many franchisors choose to base their fees off your sales instead of your profit so they don’t have to worry about tracking your spending or controlling your expenses, that will be up to you as the franchisee and owner of your business.
How long do franchise agreements last?
In the UK, franchise agreements usually last for five years, however, this isn’t always the case so be sure to check your agreement. As a general rule, the longer the renewal time will allow you to see a higher return on your investment to ensure that you want to renew for another term.
Before you sign your agreement, be sure to clarify how long the agreement is specified for and whether or not it is renewable. The agreement will outline how you renew your contract. So, it is imperative that you understand what your obligations will be so you can prepare for them when the time comes.
What happens if you break the contract or don’t renew?
The franchise agreement is a legally binding contract that both parties must abide by. However, many times if one party does end up accidentally breaking a franchise agreement there are usually steps that can be taken to make amends.
If you do break an agreement in your contract, the franchisor will usually give you a warning and give you the time to fix it. However, if you continue to not abide by the expectations laid out in the agreement, legal action could follow. So, don’t sign an agreement that you don’t fully understand so you make sure you know what is expected of you.
Additionally, you need to know when your agreement expires and what you need to do to renew it. By not renewing a franchise agreement, you risk losing everything you’ve worked so hard to build up. In the end, you need to know how long your agreement will last and what your exit plan will be once you’re ready to move on.
Why you need an exit plan
Nobody likes to think about what will happen when their new company dissolves. But, more than likely at some point you will want to exit from your business. It is best to know what your ideal situation is now before you get started.
This is especially true if you’re starting this new franchise business with a partner. What will you do if 10 years down the road when you’ve made your first million and your partner says it’s time to sell. They might be under the impression that you are going to build this business to a certain level and then cash out. But, if you were expecting to keep the business for the long run and bequeath it to your children upon retirement then there might be problems.
You need to know what your end goal is before you get started so that you know when you’ve reached it. So, the best plan is to know your exit plan now before you start.
Of course, things happen and you will need to be flexible as you run your business. However, you also need to be realistic in knowing what your exit plan is and how you want to end things when the time comes.
Don’t sign on the dotted line until you’re confident you’re happy
Now you know how important your agreement is. And, as you can see it is dangerous to consider starting a franchise without a franchise agreement. This document gives you the parameters in which you know you need to operate your business. And it gives transparency for you and the franchisor so you know what your obligations are and what will be provided for you by the franchise.
So, don’t start your new business adventure without this important document. If you have more questions about franchises, check out our getting started guide. We help new business owners like you every day ensure you have a successful business venture and you can trust us to give you independent advice you can trust.