What to expect in a franchise agreement
Andrew Gibbs, Head of Business Development
Once you’ve found the right franchise for you, you will start the process of becoming part of their network. Initially, the franchisor will need to run security checks to ensure you’re eligible to invest in the franchise, and that’s when you will begin to discuss the finer details of the agreement you will be signing into.
A franchise agreement, also known as a franchise contract, is a binding document outlining the mutually agreed conditions, restrictions, and obligations of the relationship between the franchisor and franchisee (you!). The agreement protects the franchisor’s brand and business, whilst also offering you certainty, peace of mind, and direction.
There are several topics covered in a franchise agreement, which range from fees to the operating process. To give you an idea of what you can expect to see in your franchise agreement, we’ve pulled together four of the top topics:
The franchise agreement will highlight any initial fees you will be obliged to pay on signing the document, to purchase the rights to use the brand and systems, as well as the frequency of any ongoing royalty fees. Depending on the brand, franchise model, and type of operation you are investing in, the overall fee cost will vary significantly.
Make sure you’re comfortable with the franchise fees before signing the agreement, including the payment period. Late payments could incur additional costs that you will be liable to pay, which will also be highlighted in the agreement too.
The franchise agreement will also highlight which area of the UK you are interested in running your business within. More often than not, this will be postcode generated and each postcode will be highlighted in the agreement. If you feel a postcode is missing, or the area is wrong, request for the document to be amended before signing. The size of the territory you are purchasing the rights to operate within can be subject to the franchise fee you are also agreeing to pay, so if you have requested a larger territory it may incur additional costs.
Once the agreement is signed, this will often guarantee that the franchisor will not recruit another franchisee within your exclusive territory. Double-check whether this is the case, as some franchises may not offer exclusive territories.
Franchise agreements can last for anywhere between 5 to 25 years. This allows you to develop the brand within your exclusive territory and form a solid client base, whilst also protecting the brand’s reputation with a long-standing presence.
When your franchise agreement approaches the end of its term, the franchisor will begin renewal discussions. This is a good opportunity to consider expanding your territory to manage a larger client base and approach the market as ‘new’ again.
If you wish to terminate the contract early, before the end of the agreement term, you are likely to be subject to an additional charge. This is primarily due to the impact it can have on the brand only being in a location for a short period and the loss of expected royalty figures for the remainder of your agreed term.
Franchisors will request a personal guarantor within the agreement, should they suffer any losses if you wish to terminate your contract before the agreed term. More often than not, the agreement is with the limited company you will be required to set up, so you can put yourself down as the personal guarantor.
The franchise agreement is a mutual document so ensure that you read it thoroughly and speak up if you have any questions!