What is
a franchise agreement?
In
simple terms, a franchise agreement is a legal contract signed between a
franchisor and a franchisee. Through this agreement, the franchisor gives the
franchisee the license to operate a particular business. The franchisor is the
actual owner of the business or brand. By signing a franchise
agreement the investor gets the right to sell products and provide
services to people using that brand name. The contract also details all the
terms and conditions that are involved in the partnership.
The specificities
of a franchise agreement will be different for different countries. There are
three basic types of franchise agreement: Single-unit franchise agreement,
multi-unit franchise agreement, and master franchise agreement. Let us take a
look at each of these in detail.
Single-unit
franchise agreement
This is the most
basic and traditional method of franchising. The franchisor gives the right to
the franchisee to own and operate a single unit of the business. The franchisee
can use the franchisor's brand name and trademark to do business in a single
location. Most probably there won't be any mediators between them in this type
of agreement. The franchisee will directly operate the business in the allowed
location and make a profit. In most cases, the franchisee will be the manager
of a single-unit franchise.
Multi-unit
franchise agreement
In this case, the
franchisor will allow the franchisee to operate the business in more than one
unit using the franchisor's brand name. To own a multi-unit franchise, a
franchisee should be financially capable to manage the business in different
locations. Here the franchisee cannot manage the business alone. Employees
should be hired to maintain work efficiency in all franchise units. Even though
single-unit franchises are the most common, today most business investors
prefer a multi-unit franchise because it is safer to invest in multiple
locations to survive any potential economic backlash.
This is a more
sophisticated franchise agreement where the franchisor allows the franchisee to
do business under the brand name in a region, state, or country. Thus, the franchisee
will have the full right to sales and distribution in that particular country
or area specified in the master franchise agreement. A master franchisee cannot
operate the business alone and has the license to hire franchisees under them
to carry out the business efficiently in all the different regions. This type
of agreement is necessary to expand the business at an international level.
Here the actual owner or the main franchisor will lose a huge part of control
over the company, thus selection of a master franchisee should be done very
cautiously, and a good franchisor-franchisee relationship should be maintained.
What information is included in a franchise
agreement?
●
The
franchise agreement will contain all the specificities of the relationship
between the franchisor and the franchisee. It states the name of the brand
holder and the franchisee along with the business criteria or goal that the
franchisee is bound to meet within a specified time.
●
A huge part of it includes the rights and
obligations of the franchisee. The agreement will have the details regarding
the payment of the franchise fee, marketing fee, training fee, utility fee,
transfer fee, etc.
●
The duration of the agreement will be given
in it. The franchise term can be any number of years. Once the franchise tenure
is over, the franchisee should pay another amount to continue the business and
maintain the position as a franchisee.
●
The franchise agreement will also contain
details regarding the region or territory where the franchisee is licensed to
do the business. There are two types of territories: Exclusive territory and
non-exclusive territory. Exclusive territory means that the franchisee can set
up only one single franchise in a particular territory or location.
Non-exclusive territory allows the franchisee to operate more than one
franchise in a single area or zone.
●
Another important detail mentioned in the
franchise agreement is the provision given to the franchisee to use the
franchisor's brand name and trademarks. Operation
manuals, patents, etc will also be given to the franchisee.
●
Most franchisors would want their franchisees
to have a certain amount of insurance that allows them to run the franchise
without failure. The minimum insurance amount required will also be specified
in the franchise agreement.
●
The agreement contains the details of
training provided by the franchisor to the franchisee. The training helps the
franchisee to operate the business more effectively and earn desired profit.
What is
the importance of a franchise agreement?
A franchise
agreement is very important to establish the relationship between a franchisor
and a franchisee. It gives the franchisee the legal power to use the particular
brand name, logo, etc to sell products. It also gives a space for the
franchisor to specify the terms and conditions that the franchisee should obey.
If any corruption happens on the part of either of them, the franchise
agreement becomes legal proof.
Franchise agreement word format
Most people are
confused about how to prepare a proper franchise agreement. It is a legal bond
between the franchisor and the franchisee and thus should be written very
carefully. It is always advisable to seek the guidance of business consultants
rather than copying a sample because there might be additional specifications
that you need to include depending on the type of business.
What
are the things you should check before signing a franchise agreement?
It is important to
check every minute detail before signing a franchise agreement. Both the
franchisee and franchisor should pay great attention as this agreement is the
basic framework of the franchisor-franchisee relationship. The franchisor
should be clear about the provisions given to the franchisee and the franchisee
should check the payment obligation and the domain guidelines. The franchisee
can also take a good look at the support offered by the brand owner. Franchise
tenure details regarding the renewal of franchise terms should also be checked.
Conclusion
In this article, we have discussed the details
of a franchise agreement focusing on the major things to be included in it. A
franchise agreement is very crucial to a business and has to be given
importance. It is advisable to consult a business professional to get your
facts clear on these. Are you seeking to
choose the Best Consultant for your Business? Business consultants and experts
are available on Sparkleminds, and
they can assist your business in moving to the next level. Connect with us now
