A franchise agreement is a legally binding document which sets out the rights and obligations of the owner (the franchisor) and the franchisee.
As it protects both franchisor and franchisee, it is an essential requirement for a franchise business as a clear, written contract allows both parties to know what is expected of them and prevents any misunderstandings and disputes.
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Key issues included in a UK franchise agreement are:
- Terms of the agreement - how long the franchise agreement is set for, how it can be renewed and on what terms. It also looks at what circumstances could lead to the franchise being terminated early. Expected performance criteria can also be included in the terms of agreement.
- Locations – where the franchisee is allowed to set up their franchise and also whether they are entitled to exclusive rights in that particular area.
- Costs - what fees the franchisee will pay. These are usually broken down into an initial fee and an ongoing management fee.
- Intellectual property rights (IPR) - what rights the franchisee has to use the franchisor’s intellectual property, such as trade marks, logos etc.
- Restrictions - what restrictions there are imposed on the franchisee in terms of what they can and can’t do.
- Obligations - franchisors will often stipulate how the franchisee should run the franchise business. Minimum stock and staffing levels would be included here, where the stock can be purchased from and what products are allowed to be sold.
- Training and support – what training and support the franchisee will receive. The amount of help the franchisee gets from the franchisor is often critical for success both when starting the franchise and continuing it into the future.
- Marketing – what marketing obligations both the franchisor and franchisee have in relation to promoting the business.
- Termination - what happens when either party wants to bring the agreement to an end or sell the business.
Franchise agreements are produced under contract law and do not have to conform to any further legislation or guidelines.