The Ultimate Guide to Franchise Agreements

If you’re considering buying a franchise, getting acquainted with franchise agreements first is best. This way, you know what your rights are, the ins and outs of business operations, and the limitations of your franchise. This ultimate guide will tell you everything you need to know about franchise agreements. 

What is a franchise agreement? 

A franchise contract or agreement is a legal document that indicates the rules of running a franchise. This is between the franchisor and franchisee (you), explaining what is expected of the franchisee in running the business. 

Every franchise agreement is different because every business is also structured differently. The critical thing is that the franchisee adheres to the stipulations in the franchise contract. A franchise attorney will also review this legal document, and the franchisor and franchisee will sign the contract. 

What is in a franchise agreement?

Although every franchise agreement is different, a few things remain constant, such as:

• Territorial rights
• Operating procedures
• Disclosure
• Training
• Ongoing support
• Initial fees
• Ongoing fees
• Marketing obligations
• Trademark and intellectual property
• Duration
• Renewal rights
• Termination and cancellation policies
• Obligations upon termination
• Non-competes
• Record and audits
• Physical premises and renovations
• Arbitration

What are the benefits of a franchise agreement?

Buying a franchise offers many benefits compared to building a business from scratch. And ensuring a franchise agreement comes with it also provides franchisees with these advantages:

Name recognition

Most people prefer buying a franchise due to lesser capital investment than building a startup. A franchise agreement stipulates the franchisee’s rights to use the trademark or brand name and operate the business.

Support and training

A franchise agreement also indicates the support and training you’ll get from the franchisor. This ensures you’ll always have assistance establishing your franchise’s reputation according to standard procedures. 

Quality control

Having a franchise contract means the franchisor and franchisee follow certain qualities responsible for the brand’s success. This ensures your franchise will not decline and lose customers due to poor product or service quality. 

What are the four types of franchise agreements?

The four major types of franchise agreements are:

• Single-unit franchise agreement. This is the most common franchise agreement, wherein the franchisor grants the franchisee rights to operate a single franchise unit. Most new franchisees prefer this because it’s the simplest structure and easy to set up. 
• Multi-unit franchise agreement. This franchise agreement grants franchisees rights to operate multiple franchise units in various locations. However, franchisees adhere to certain conditions on territorial rights. 
• Area development franchise agreement. Like a multi-unit franchise agreement, the area development franchise agreement grants franchisors to operate multiple units with duration limitations. The franchisor also allows development in particular territories.
• Master franchise agreement. Like the area development franchise agreement, the master franchise agreement grants franchisees rights to operate multiple units in particular territories and even sell franchises. The franchisee may also act as a franchisor and will benefit from royalty fees and perform training and support for their franchisees.

How long is a franchise contract?

Although many factors affect the length of franchises, the average franchise length across all industries is between five and 20 years. Some factors, like industry changes, trends, and market conditions, may also affect the franchise length. 

Do franchise agreements expire? 

Like all contracts, franchise agreements also come to an end. If there is a breach of contract or other issues that will force the franchisor to terminate the agreement, the franchise contract may be terminated earlier than the stipulated duration.

Also, the franchise agreement ends if the franchisee doesn’t renew the contract. However, a franchise agreement doesn’t always have to be extended or renewed. Sometimes, the franchisor or franchisee may even end the franchise agreement early. Some reasons could be when the franchisee wants to sell their franchise unit or if the franchisor goes bankrupt. 

What happens if you break a franchise agreement?

Violating a franchise agreement could cause litigation or legal actions. Depending on the severity of the violation, some minor infractions may not warrant legal action. However, some severe violations could cause franchisors to take legal action. 

Sometimes, the franchisor and franchisee may settle the violations privately with a settlement agreement. 

Can you cancel a franchisee agreement?

A franchisee can cancel a franchise agreement if the franchisor fails to provide support and training as indicated in the contract. Another reason for cancellation is when a franchisor commits fraud, goes bankrupt, or becomes insolvent. Finally, a franchisee may cancel the franchise agreement if the franchisor fails to protect the franchise unit’s opportunity or territory. 

Conclusion

Franchise agreements are crucial when buying a franchise. The lack of franchise contracts means chaos for franchisors and franchisees, resulting in poor business operations. Also, a franchise agreement is a way to ensure that franchisees get higher success rates after buying a franchise. 

Looking for businesses to franchise? Check out FranchiseHow for some low-investment franchising opportunities.