Franchising offers a structured way for businesses to expand and for individuals to operate a business under an established brand. Central to any franchise relationship is the franchise agreement—a legal contract that defines the rights and obligations of both the franchisor and the franchisee. Understanding what a franchise agreement is and how it functions is essential for anyone considering entering into a franchise arrangement.
Defining the Franchise Agreement
A franchise agreement is a legally binding contract between a franchisor—the owner of a business concept, brand, and operational model—and a franchisee, who is granted the right to operate a business using the franchisor’s system. This agreement governs the relationship for the entire duration of the franchise term and lays out the framework under which the franchisee must operate.
While there is no single format, most franchise agreements share core components. These typically include the scope of the franchise rights, fees and payments, training and support provided by the franchisor, operational standards, marketing obligations, duration of the agreement, and termination conditions. Because franchising is not governed by a specific law in the UK, the agreement serves as the primary legal document that dictates how the franchise will run.
Key Functions of the Agreement
The franchise agreement serves several important purposes. First, it protects the franchisor’s intellectual property by granting the franchisee a limited license to use trademarks, logos, and proprietary methods. This ensures the brand is represented consistently across all franchise locations.
Second, it defines how the business must operate. This includes everything from hours of operation to product or service quality, supplier choices, and employee conduct. By setting these standards, the franchisor maintains brand integrity and customer experience.
Third, it establishes the financial arrangements between the parties. This includes the initial franchise fee, ongoing royalties based on revenue or profits, and contributions to national or regional advertising funds. The agreement also sets expectations for how these funds are used and how financial performance is monitored.
Responsibilities of Each Party
The franchise agreement makes clear what each party is expected to deliver. The franchisor is usually responsible for initial training, providing an operations manual, offering ongoing support, and ensuring the franchisee is able to operate successfully under the brand. In turn, the franchisee agrees to follow the franchisor’s systems, uphold brand standards, and make all required payments in a timely manner.
Additionally, the agreement may include non-compete clauses that prevent the franchisee from starting a competing business during and after the term. It may also have renewal conditions and rights of first refusal for additional territories.
Conclusion
A franchise agreement is the backbone of any franchising relationship, ensuring that both franchisor and franchisee understand their rights and responsibilities. It outlines every critical aspect of how the franchise will operate, from brand use to financial obligations and termination procedures. Since it is a legally binding document, it is essential for both parties to review the agreement carefully and seek legal advice before signing. Done correctly, a well-drafted franchise agreement sets the stage for a successful and profitable partnership.