A Typical Franchise Agreement Explained in Simple, Plain English

A franchise agreement is the document that describes the franchise relationship between someone who has decided to franchise a business (the franchisor), and someone who wants to buy a franchise and have the rights to use the system (the franchisee).

A professional franchise agreement is a detailed and complex document. As a franchisor, I’m very proud of our agreement. It has been drawn up by top specialist franchise lawyers. As full members of the British Franchise Association, and award-winning HSBC Franchisors of the Year, we have a duty to ensure that it is fair, ethical and abides by the guidelines in the franchise industry.

Uniquely to on entrepreneurbeginner.com I’m going to take you step-by-step though a typical franchise agreement like ours in an absolutely honest and friendly way. Rarely are franchise agreements explained or discussed like this in such depth - especially in the Internet!

I think, as I pull each section apart for you, you’ll find this useful if you’re preparing to buy a franchise of if you’re an entrepreneur ready to franchise a business.

Potential franchisees wanting to buy a franchise will begin to understand what to expect from a franchise agreement, and potential franchisors who want to franchise a business will begin to understand the sort of things that need to be included and why.

I’m not suggesting that this page is a replacement for working with a lawyer, but I hope that it is a useful first step to understanding the necessary complexities of a top-quality ethical franchise agreement, so that if an when you do go for professional advice, you’ll be much better informed to begin with, whether you want to buy a franchise of franchise a business.

I’ll introduce you to the individual sections of a typical franchise agreement in turn, and tell you what to expect in each and why.

Before we start, one of the first things you’ll probably notice about a franchise agreement is that there’s not much punctuation in it! There are very few commas, long sentences, not many full stops, that sort of thing. This is not because the lawyer who has drafted it is a bit illiterate, but rather because punctuation can create ambiguities in text, so lawyers tend to leave it out whenever they can. It’s like the saying (which was made into a book about punctuation)...

Eats shoots and leaves

Which has a very different meaning with a comma added...

Eats, shoots and leaves.

See what I mean?

The main function of a franchise agreement is to be crystal clear and unambiguous for both parties. That’s what success looks like.

Every franchise agreement will, of course, be slightly different depending on what the business actually is, and also the particular country and area that the franchise will trade in. My information then is necessarily somewhat generalized in places.

An Important Tip Before we Begin

It's short for Uniform Franchise Offering Circular. This UFOC is designed to provide potential franchisees with all relevant information regarding the establishment of a working relationship with the franchisor.

UFOC's do cost a bit of cash to get hold of (they take a lot of preparation), but it is money extremely well spent, and at entrepreneurbeginner.com I've made getting these a simple, quick and easy process. There's a link for you a little further down the page.

You really do need to recognize that this UFOC is the most important document that you can read prior to making your move to buy a franchise, and it provides an absolute ton of truthful, important information that you will need to make fully-informed decisions when you are planning to buy a franchise.

When start thinking you'd like to buy a franchise, it's easy to get really excited about it. The RIGHT one can be life-changing and wonderful. But it's important not to become emotionally, financially, or psychologically committed to a franchise until you have the answers contained in the UFOC.

So, here's my recommendation for you right now. Buy the UFOC for a few of franchises that you like the sound of. Compare them carefully and then you'll be on exactly the right track. Do this BEFORE you contact the franchisor, so that you'll have all the right information to hand, and will appear knowledgeable. Any money you spend on UFOC's will be recouped time and time again in the future.

Up to now, the problem has always been getting hold of these UFOC documents. Well, don't worry, I've completely solved that for you. The link below will take you to a site that absolutely specializes in serving up these hard-to-obtain UFOC's and at a discount of at least 59%! What I love about this unique service, is that you can have these vital documents on your desktop, and be reading them in five minutes or less. I urge you to take this as a crucial first step now...

Parties

This section of the franchise agreement sets out the names and addresses of the people in party to it. Usually this is the franchisor (the owner of the business system) and the franchisee (the person or persons buying the rights to use it).

Our particular franchise agreement is usually a sole trader one, which means that the agreement is between us as the franchisor and one individual franchisee. However, sometimes they are partnership ones, which mean that they are between us and perhaps a husband and wife jointly.

Potentially, you could also have an agreement between a franchisor and a company as opposed to an individual franchisee.

Recitals

It will also normally point out that the franchisor has developed a reputation, demand and goodwill for the system and the brand, and that the franchisee wants to take advantage of all this, and is willing to promote it properly.

Definitions

Often there is a list of around twenty or so such phrases. Next to each of these will be a specific definition of what the phrase means in the context of the franchisee agreement.

This is a good idea, because then no one is in any doubt about definitions of these important phrases later on.

Indeed, this is what the main purpose of a good franchise agreement is really all about - making things between the two parties clear and unambiguous.

Grant of Franchise

It will normally go on to say that the franchisor won’t give another franchisee a franchise opportunity in the same territory, and that the franchise shall conduct the business in accordance with this agreement in an approved venue or premises.

Commencement of Franchise and Term

A franchise agreement often runs for a period of at least five years, and this period is usually known as the “Term”.

Things like “Commencement Date” and “Expiry Date” will be phrases that have been explained in the definitions section of the franchise agreement - see how useful that section already is. However, the actual dates are often placed into one of the “Schedule” sections at the end of the agreement, which I’ll talk about later.

Option to Renew

However, that being said, the franchisor will want to impose some conditions on the renewal. These restrictions will be outlined in this section.

Basically, they will say that the franchisor will only grant a renewal if the franchisee has observed the franchise agreement properly and has not breached any of its conditions, and perhaps that some minimum sales targets have been achieved, and that, if the venue or equipment needs refurbishing, then the franchisee agrees to pay to have it done, so that the business stays looking good.

Increasingly in the franchise world, renewals are often free. This is because the franchisor benefits from the continuation of the business and, in effect, is rewarding the franchisee for all their hard work. Often the only real costs are the requirement that the franchisee pays for any legal work needed in the preparation of a new agreement.

In our particular franchise agreement for Clive's Easylearn Pop Music Schools, renewals are completely free.

Payment of Fees

This section will outline how that percentage, together with the initial fee (sometimes known as the franchise fee) for the license to operate the system, shall be paid. Usually the payments are made to the franchisor monthly in arrears.

It will also specify the percentage rate, which is likely to be between around 15% (although this can vary depending on the type of business and how it is conducted and so on).

Records and Accounts

Usually there will be specific methods of accounting within a franchise business that need to be followed. These days, you may find that some or all of this procedure is carried out online. This is very time-saving and also means that everything is laid out in a systematic way, which is the same for all franchisees. It saves franchisee’s time, promotes accuracy and, from the franchisor’s perspective, they will be able to see the whole network at a glance on their screens. In our franchise business, everything is online, and we won the HSBC Award for Enterprise partly for our industry-leading online systems.

The Premises

For example, it might be a rented hall, used once a week (as in the case of the franchise that I developed - Clive's Easylearn Pop Music Schools - or it may be in a premises on a high street with a lease attached to it.

Whatever the type of premises, this section of the franchise agreement will normally require that the franchisee seeks the franchisor’s approval on where to site the business, and complies with stuff like planning regulations and byelaws and so on.

The franchisor will want to sure that his brand isn’t being traded in some shabby dump, which would damage the perception of the brand!

The Franchisor's Obligations

It will normally include a number of sub-clauses revolving around things like helping the franchisee in the getting the business started, providing consultation about the suitability of the premises and the purchase of correct equipment and so on.

Generally then, all the things that the franchisor is going to provided prior to the business being launched.

Continuing Obligations

It will often state things such as the franchisor retaining a continuing and bona fide interest in the success of the business, providing advice and guidance, making improvements to the system and providing support as needed.

It will often close by stating that, if the franchisee is in breach of of his or her obligations, then the franchisor can withdraw their support, which I think is fair enough.

Intellectual Property and System

This may be instruction books, special ways of doing things or (in our case) hundreds of music lesson plans and so on.

So, this section of the franchise agreement, it typically states that the franchisee is able to use all this stuff to run their business, but recognizes that it’s all owned by the franchisor.

One of the key things in a franchise agreement will be the brand name and the logo, and this is discussed here too. The brand in a franchise business is usually considered something of great commercial value, which is very valid - after all, take Mcdonalds for example - without the brand and the logo and associated items, the business would be just another burger joint. The brand image generates huge profits, because, as the business grows and develops, people come to trust the brand name.

This section of the franchise agreement will often point out that the goodwill generated from the brand is owned by the franchisor too.

There will also normally be something about how the franchisee should inform the franchisor if they suspect that someone else is trying to run an imitation of the brand or passing themselves off as a provider of the system, and will set out the procedure for co-operating with the franchisor to take action against any such people.

This is a good clause, as it will often give the franchisee some help and support if there is someone in his area pretending to be the same business.

There will also be some statements that prevent the franchisee himself from registering any of the franchisor’s trademarks or domain name, and indemnify (stop the franchisor from being financially penalised basically) against any losses from any unauthorized use of the intellectual property.

This section of the franchise agreement will quite often close with a general clause that basically says that, even after the termination (or ending) of the franchise agreement for whatever reason, the franchisee agrees to not reveal, use or benefit from the intellectual property that they’ve had shared with them.

Products, Materials and Equipment

Normally this will be introduced with an explanation of how it’s necessary for all franchisees to operate the same to ensure uniformity (which is what franchising is all about), and will go on to talk about how the equipment used should remain in good condition and be safe for customers to use where applicable.

Sometimes, there will also be some specifics about where equipment must be bought from and what specifically is needed - although the actual list itself may end up in the schedules at the end of the franchise agreement.

Training

For example, in my case, as a franchisor, we state that we will be offering a two-day training weekend at a designated place, and that the cost of this is included in the franchise price.

For a business such as ours, backed up with a huge online support system, this is more than adequate, but different more complex businesses, or ones will less developed online support system, may offer a longer training period.

Franchise agreements will often go on to say what additional training is available and what that additional training may (or may not) cost, and how that will be made available.

In addition, you may see a clause that states that, should franchisee be rubbish at the initial training, then the franchisor reserves the right to terminate the franchise agreement and deduct some costs.

This is to prevent a franchisor from being stuck with a franchisee who, on closer “inspection”, turns out to be awful! It rarely happens, but it’s usually provided for.

On our franchise agreement, there is also a clause that requires the franchisee to let us know if they intend to employ additional staff, and we have the opportunity to vet them and approve them. This is useful in our case (and many others), as we have a franchise business Clive's Easylearn Pop Music Schools, where the franchisee is working directly with children and providing music lessons. We obviously want to exercise some control of who is placed in front of our young customers.

Control of Standards

The purpose of this section in a franchise agreement is to specifically state that both franchisor and franchisee accept and agree the necessity of these standards, skills and customer service.

Given that over time, things improve, there is usually a clause that states that the franchisor may change things for the better.

Sometimes, the franchisor will encourage franchisees to input their ideas too. Often with the hindsight of a few years operation on the shop floor, franchisees are able to suggest useful ideas for improvement, and a good franchisor will encourage this.

However, there is often a clause that says that, should any such improvements be used, then the franchisor owns the copyright!

This section can often be quite lengthy, and you may well find clauses revolving around giving the franchisor the opportunity to contact customers or staff at any time, or monitor complaints if and when they are received, in certain specific ways.

Other standards-based points may also be made here, such as ensuring the staff are correctly attired for their work, are efficient, honest, courteous and so on - all really important stuff that a good franchised outlet will be great at and - even more importantly - keep customers coming back time after time and developing trust in the brand - and hence more profits for everyone!

In our UK music teaching franchise business, Clive's Easylearn Pop Music Schools we also have clauses in this section that require franchisees and staff to successfully pass a Criminal Records Bureau check. You may have something similar in the country that you’re trading in.

Finally, you’ll normally find something about how the franchisee will be given recommended selling prices for the goods or services, but that they don’t have to charge this (price fixing in this way is illegal in some countries), and that they will put up a board somewhere in the premises stating that the operation is a franchised business and giving the name and address of the franchisees.

Wow - big section, but it’s been important one!

Confidentiality

Because of this, the franchisor will usually be very specific about the protection of their system, through some confidentiality clauses. which expressly prevent information being passed on - all a bit top secret.

It’s all very serious though. A franchisor may have put many years of their life into developing new and unique ways of doing something (I have spent over 25 years on mine for example) and, understandably wants very much to protect that investment.

Franchisee's Obligations

In general, there will be a requirement to carry on the business properly and in accordance with the operations manual. The franchisee will be required to devote necessary time and attention to the business and be diligent and efficient.

If there are specific things that a franchisee is required to do, then these will also be listed here. For example, in my rock and roll franchise, my franchisees are required to run a live gig once every six months with the customers on stage, and give all the proceeds to a local registered charity.

In this section, there will also be specific and explicit information as to how the franchisor’s ongoing royalty fee shall be paid, and how the franchisee shall be responsible for their own operating expenses and so on.

Also, because a franchisor will sometimes want to get all franchisees together, you will often find a clause stating that the franchisor reserves the right to convene meetings and that (normally) the franchisee shall bear the costs of getting to these, and also pay for any accommodation that is required, together with any salaries of staff members that result. For example, if you leave your business to attend a meeting, it may be that you have to bring in a manager to cover etc. On occasions that franchisor may want the franchisee to bring junior staff to such meetings too so that he can train them. Again, this sort of clause provides for that sort of thing.

Sometimes there will be a clause here that gives the franchisor opportunities to bring potential new franchisees to see the business in action.

On from that comes data protection. There is now a lot of legislation about how customer data can be held, and most franchise agreements will require that franchisees comply with any given legislation in force in the country or territory in which they are trading.

Target Sales

Usually there is some latitude and franchisees that, for example, don’t hit targets in year one, are given the chance to make up in year two. However, if a franchisee continues to perform badly - and usually this is because they have lost interest anyway - then there will often be a clause to give the franchisor the opportunity to call a halt and terminate the agreement with a view to selling the territory to someone else.

If there’s a list of target sales figures, then usually this is placed in one of the schedules at the back of the franchise agreement.

Restrictions on Franchisee

Essentially this will revolve around clauses that prevent the franchisee from being engaged in any other similar business during the franchise term, and also for a specific period of time after it.

This is to prevent franchisees from trying to run off with the customer base and set-up in competition on their own against the franchisor. Believe me, this does happen. A good “restrictions on franchisee” section will stop it occurring.

This sort of thing has happened to me as a franchisor. In one or two of our very early franchise agreements, this clause was pretty much non-existent. Being a friendly, family firm, we trusted one particular franchisee, and guess what? They turned round and did the dirty on us and set-up in competition. Unbelievable we thought at the time, but as you learn more about business and the way that people can change into monsters when money comes into the equation, the more we realized that a robust clause was important. It’s there in our more recent franchise agreements. Shame that these things need to be so specifically written down in my opinion, and more in life can;t rely on trust, but there it is.

Marketing, Advertising and Promotions

Sometimes there will be minimum sums that must be spent on the business on a regular basis. These are often expressed either as percentages of turnover or sometimes as a specific financial figure.

From a franchisor’s point of view, this ensures that franchisees will be making a proper effort. From a franchisee’s point of view, the spending of money usually encourages more drive and determination to succeed.

In this section of the franchise agreement there will also normally be made reference to the materials that are available to the franchisee and also - crucially - that the franchisee is only allowed to use approved marketing materials to promote the business.

This is an important point, because having good quality material used consistently across a growing franchise network, and having it all the looking same, quite quickly develops a brand awareness, and the more people recognize a brand, the more they will trust it and buy from it.

What a franchisor doesn’t want is scruffy low-cost marketing being carried out. It cheapens the brand.

To prevent this there will be some from of specific repository where material can be chosen from and usually either the franchisor or a designated advertising agency do the customization (phone numbers and specific information about where a specific outlet is), and then issue that “approved artwork” to the franchisee.

In the case of my franchise, we have all the approved advertising and promotional materials - from simple black and white flyers, through color glossies and even radio audio commercials, stored in an online Marketing Toolkit that franchisees can access behind a specific password and login on the Internet.

This section often concludes with a clause that reminds the franchisee that he or she must not advertise outside their own territory.

Vehicle

Which brings me neatly onto...

Insurance

1. Public LiabilityIf a customer gets hurt on the premises or due to something that happens in connection with the business, then the franchisee is covered.

2. Employers LiabilityDitto on the above, but this time it relates to employees of the franchisee.

3. Equipment and Premises Insurance

4. Fire, theft - similar to the sorts of things that are covered on a household policy.

Obviously these are important things to have from the franchisee’s point of view, but equally they are just as important if not moreso from the franchisor’s perspective, as they are the first step to indemnifying the franchisor from any lawsuits based on negligence of the franchisee.

For this reason, the franchisor will normally have a clause written in this section of the franchise agreement that requires the franchisee to keep their insurance policies up to date for the term of the franchise agreement, and to prove it by supplying photocopies of certificates.

Indemnity

This will usually state that the franchisor will have no liability or responsibility for any injury, loss or damage to any person or property in the course of the operation the business however it’s caused.

There is likely to be another clause that indemnifies the franchisor against any legal actions or claims and so on, which is all fair enough in my view.

Improvements

Force Majeure

Sale of Business

Sometimes franchisees buy a franchise in the first place, with the intention to sell it on within a given period of time and develop equity from the business that they have built up.

These days, franchise resales are quite common. For an incoming franchisee in a resale situation, they will have the unique opportunity to buy a business that is already set up with staff, premises, equipment and customers with an existing turnover.

For a franchisor, a resale is the opportunity to inject new blood into a franchise territory, and a franchise resale often results in the business getting a new lease of life, and turnover rising sharply.

So, handled correctly, everyone wins. Before I discuss some of the sorts of clauses necessary to bring about this happy state offairs, let me outline very simply what an outgoing franchise will be selling.

There are two main elements. The first is “goodwill and customers” - essentially the customer base. Particularly measurable and relevant in a franchise like our rockschools one, Clive's Easylearn Pop Music Schools as the customers all come for weekly lessons and pay in advance at the start of the month by standing order.

The customer base and its value can be more difficult to assess in other business where trade is not based on structured repeat business.

The second element is the equipment and, in some instances the lease on the premises.

So, the franchisee offers for sale goodwill and premises in effect.

The franchisor provides the incoming new franchisee with a new franchise agreement, which he charges the going rate for normally.

The sale of business section of the franchise agreement will set out the basic mechanism for this sale to take place. Usually there will be some conditions imposed by the franchisor, such as that they must vet and have the right to approve or reject any proposed purchaser - this is important, as the franchisor will normally only let people into his or her network that are deemed to be suitable as franchisees.

There will likely also be stipulations with regard to competition, in as much as that the incoming purchaser cannot be engaged in a competing activity and so on.

There will also be stipulations around preventing the outgoing franchisee from disclosing any of the knowhow in the business to a potential buyer, and also the method of training and handover will normally be outlined.

In addition, the franchisor will normally reserve the first refusal right to buy the franchise outlet back - sometimes running an outlet directly can be much more profitable than franchising it, from the franchisor’s perspective.

Finally, there will generally be a clause that says that the franchisor shall be entitled to a small percentage of the sale price if they directly introduce the eventual buyer - a bit like the agreement that homeowners have with their estate agents. In fact, in a very large percentage of cases, the franchisor is the person who does introduce the buyer in the franchise world. This is often because the franchisor is already marketing the franchise opportunity generally, and has a campaign running.

I’d just like to close this section with a word about values. At franchisor association meetings in the UK that I’ve attended, the question of the resale “value” of a franchise often comes up. The answer that is normally given is that a franchise can be valued (very roughly) at 1 x its annual turnover.

However a business, rather like a house, will ultimately end up being sold for what the potential purchaser is prepared to pay for it. Hopefully though, this will give you a guide to act as a bit of a starting point if you find yourself in this situation.

Death or Incapacity of Franchisee

I think you’re probably beginning to see how whether you’re seeking to buy a franchise or franchise a business, how important a professional franchise agreement is to have in place!

I remember thinking, as a franchisor, that it would be unlikely that we would ever need to use the provisions within this section, but, as time goes on and you get more franchisees in the network, then the laws of probability seem to take over, and we have a had a franchisee falling down stairs and completely losing his memory, a franchise contracting a rare form of cancer and being unable to continue... and so it unfortunately goes on.

With this in mind then, the provision of this section revolve around what should happen if someone becomes incapacitated, how long before something is done, and what happens to the franchise if the original franchisee dies.

Normally there’s a provision for the franchise to be passed on to another family member with certain conditions, or for the franchisor to appoint a manager to keep the business afloat (and charge the franchisee or their estate for this).

There will often also be a course of action open to the franchisor to terminate the agreement in extreme circumstances, which brings me on to...

Termination

It is, (or should be) therefore, a last course of action forced onto the franchisor, I always think that it’s quite sad if a relationship breaks down to this point, but business is business, and money has a nasty habit of souring even the most initially cordial relationships. Hence, this section is always required.

It is required, too, for both parties. A franchisor should outline the grounds for a termination situation and, equally, the franchisee should understand what these grounds would be. That way, at least when a situation of this nature does unfortunately occur, there is a clear reason for it.

So this section of a franchise agreement normally states a number of explicit reasons why a franchisor may terminate an agreement.

It will most likely begin with something about a breach of what’s called “substantial terms”. These are a few key clauses from the franchise agreement that are deemed to be super-serious, and these are usually laid out as a list of clause numbers (each clause in the franchise agreement is referenced by a number, such as 16.1.2 and so on), in one of the “schedule” sections at the back of the agreement.

A substantial clause may include, for example, the timely and accurate payment of fees to the franchisor.

The section will often go on to state a rectification mechanism, so that, if a franchisee does something wrong, then the franchisor will state what they will do to advise the franchisee of their mistake, and also how much time they will give for it to be put right before they do something serious about it.

The reasons for termination will usually be stated around things like the failure to commence the business by an agreed date, misuse of the goodwill or the intellectual property (stuff we’ve discussed earlier), refusal to fix or refurbish things after being asked to do so, or if the franchisee has been convicted of a criminal offence that could adversely affect the franchise.

You will also often see clauses that allow termination if the franchisee has lied, become insolvent or threatens any legal action against the franchisor.

Finally, the length of notice that a franchisor will give is provided, and this is quite often thirty days.

Conditions following Termination

For these reasons, and many more like them, there are once again usually some very specific sub-clauses to drive this process and ensure that what, at this stage will be a very dysfunctional relationship between franchisor and franchisee, can be brought to a reasonably satisfactory conclusion.

Essentially, these will tell the franchisee that they have to cease to run the business and trade under the franchisor’s brand name, which means removing all advertising, branding and similar from the trading territory and the venue, and sometimes revoking the right to use the trademarks at any relevant trademark registry office if appropriate.

There will normally also be a block placed on receiving phone calls in connection with the business, and possibly the transfer of phone lines to the franchisor (sometimes using a divert process).

It will also seek to prevent the franchisee from divulging any business information or knowhow to any third party and include the requirement to deliver up all materials, signage, records, accounts and other such items relating to the business as the franchisor shall decide he or she wants back.

There will also be a requirement for the franchisee to pay off all their debts to third party creditors and to the franchisor.

Sometimes there will also be a “liquidated damages” clause, which will enable the franchisor to recover some of the monies that he would reasonably be expecting to receive in royalties if the franchise agreement had carried on. Often this is calculated using an average based on the general trading of the business, with a discount being given by the franchisor of sometimes up to 30%, seeing as the franchisor will no now be required to provide its obligations, like ongoing training, support, IT systems and so on to the outgoing franchisor.

To be clear with this, sometimes a franchisor will provide a specific formula for calculating these “damages” and write that into the franchise agreement at this point.

Notices

Basically, this normally means that it will have to be done through gold old “snail mail” unless both parties agree to the contrary and email is designated to be allowed.

Reservation of Rights

Interpretation

It’s all about enabling the franchisor to exercise his or her rights in a flexible way. For example, if something goes wrong and the franchisor doesn’t immediately do anything about it, this does not mean that it is not still wrong and can’t be actioned against later.

This section of a franchise agreement will often also have something along the lines of, if one clause in the agreement is, for whatever reason, deemed to be unenforcable in a court of law, then it will not affect the validity or legality of the rest of the franchise agreement. That’s good to have in place for both parties.

So, if a judge says “I don’t agree with that clause for such and such a reason,” he can’t use that as a mechanism to dismiss the whole of the rest of the franchise agreement as being invalid.

Often, you’ll also find a subsection here called “survival of obligations”, which will talk about the fact that certain things will still be valid after the franchise agreement has ended for whatever reason.

The sort of things in mind here might include ongoing confidentiality of the business process, for example. Depending on the business, there will sometimes be a few others too.

Many of these clauses are added “for avoidance of doubt” as it’s often called, so that there is as much clarity as possible in any situation. For example, in this section there may be a sub-clause that states that the franchise agreement does form absolutely everything that has been agreed between the two parties, and that there’s nothing else, oral, promises or whatever that are valid after signing.

Incidentally, if there were some other things that had been agreed, the normal form would be to place these in a “sideletter” to the agreement, which is, as it’s name suggests, a letter format that is signed by both parties and specifically modifies or adds to a bit of the franchise agreement.

On much the same topic, there will usually be a line or two called “no representations” which specifically states that the franchisor has made no guarantees of minimum income that the franchisee is relying on, and has been advised to discuss the contents with an independent legal adviser, and also that the franchisee recognizes that the business venture involves risks and that its success will be directly affected by the franchisee’s ability and commitment as a businessperson.

I think it’s important for everyone to recognize that a franchise business, whilst it has a lot more chance of success, is not a guaranteed gold-mine.

I’ve seen different people achieve wildly different levels of success, based on their approach and dedication long-term to the development of the business. The best franchisees are usually the ones that keep going if the going gets tough, and don’t throw in the towel at the earliest opportunity. Success in any business is achieved through long-term, steady commitment in my opinion and experience.

Anyway, the section usually concludes by stating that the franchise agreement will be governed by the law of the land that the franchise is operating in.

Schedules

Signatures

In Summary

The documents can be a lengthy for these reasons (ours runs to about 45 pages), and should be drawn up by a competent lawyer who is well-versed in franchising. Ours, for example is written by Owen White Solicitors in England, who drafted the original constitution for the British Franchise Association back when it first began - so they know what they’re doing.

Franchisees should have nothing to fear from a proper, ethical franchise agreement. Indeed, as you’ll have read, there are a large amount of elements to protect them directly.

If you’re a potential franchisee of a brand and you are presented with a short, badly-written franchise agreement that doesn’t cover all of the elements that I’ve gone through here with you, then you should be skeptical of it. It is much better to have a proper agreement as the basis of your business - even if at first it does look complicated, scary and perhaps unnecessary. For the reasons that I hope I’ve outlined, it actually isn’t any of those things, and I think you can probably appreciate that now.

Turning to franchisors. If you are seeking to franchise a business, then with a professional franchise agreement, you will be building on a strong, stable and reliable bedrock.

Quite simply then, I hope that I’ve been able to show that a good ethical franchise agreement benefits both parties equally.

I’m often asked how much it costs to prepare a proper franchise agreement. Well, it’s a difficult one to answer comprehensively as I’m not a lawyer, and franchise agreements will vary in complexity depending on the business type they are written for. However, for reference, We paid the equivalent of $10,000 for ours in 2008.

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