What is a franchise agreement?
Franchising is a business expansion or growth strategy that combines a licence of some or all of a business' brand, rights to sell branded products and services and intellectual property that might include a business model, know-how and procedures with the on-going sale of materials and equipment.
The business relationship is beneficial for both the business owner (the franchisor) and the licence holder (the franchisee).
The franchisor can grow the business' reach (perhaps in to markets that they cannot reach themselves) without capital investment and with minimised risk. They receive a franchise fee (usually either a set amount or a percentage of revenue) in return.
The franchisee obtains a business that may already have brand recognition and that may have business systems, processes and procedures in place to get it off the ground quickly. They are likely to have support from the franchisor, particularly with brand marketing and use of the franchisor's system.
A franchise agreement is the legal document that regulates the relationship, setting out the licence that the franchisor grants to the franchisee, what each party can and cannot do, and business procedures to be followed.
A franchise is usually granted for a limited time period and for a limited market (whether a certain geographical area or a specific type of customer or client).
Conditions of a franchise agreement
There are generally three categories of conditions relating to a franchise agreement: franchise ownership; financial obligations and operation of the franchise.
Contractual terms are likely to include the duration of the agreement (known as the term), initial and ongoing fees and royalties, how the franchised business should be operated, quality control standards, developmental assistance by the franchisor, training and marketing, confidential information protection (such as of trade secrets), non competition, dispute resolution and termination.
How long is a franchise term?
A franchise term is typically between 10 and 20 years. There is no minimum or maximum requirement in law, so it could be as little as a few years or indefinite.
However, the franchisee is likely to want a long enough term to make any capital investment in the business worthwhile. If the franchisee plans to sell the franchise they own, they will need a long enough remaining term to make it worth while someone else taking it on, or there will need to be rights to renew given in the franchise agreement.
The franchisor is likely to want the flexibility to end a franchise relationship. One way that can be done is by the expiry of the term and the negotiation of a new franchise agreement, but there are other ways that can be planned for in the franchise agreement, such as the right to buy the franchise in preference to other buyers, or early termination for material breach of the contract.