This Franchise Agreement is for a person or organisation who wishes to grant the right to another person or organisation to operate an outlet of the franchise business within a particular territory. This legal document template is suitable for use by a UK based business.
Franchise businesses in the UK
A franchise business is a business in which the owner (the franchisor) grants a licence to another person or organisation (the franchisee) which entitles the franchisee to trade as their own business under the brand of the franchisor within a particular territory or location, following a proven business model. The franchisee also receives a package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.
In the UK there are no specific legislation governing franchising; franchises are subject to the same laws that govern other businesses and franchise agreements are made under regular contract law and don't need to conform to any additional legislation or guidelines.
A franchise legal agreement
A franchise agreement is a legally binding document setting out the rights and obligations of the franchisor and the franchisee. It is an is essential part of the franchise business. A clear, written contract lets both parties know what is expected of them and can help prevent misunderstandings and disputes.
There are a number of key issues that a franchise agreement must cover, including:
- Territory and exclusivity - what geographic area the franchisee can operate in and whether they have exclusive or non-exclusive rights in that territory;
- Term - how long the franchise lasts, how it is renewed and on what terms.
- Fees - what fees the franchisee will pay. There is usually an initial fee to pay and then an ongoing management fee;
- Intellectual property rights (IPR) - what rights the franchisee has to use the franchisor's intellectual property, such as trade marks;
- Restrictions - what restrictions there are on what the franchisee can do. Franchisors often stipulate how the franchisee should run the franchise business. Minimum stock and staffing levels are common, as are where the stock is purchased and the price at which the franchisee can sell the products and services.
- 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 on a continuing basis;
- Termination - what happens if either party wants to bring the agreement to an end or sell the business.
Advantages of running a franchise
There are many advantages to owning a franchise business including:
- The business has already been proven to work - the franchisor and the network of other existing franchises are proof;
- The franchisee is fully trained in all aspects of the business and often receives on-going support from good franchisors, delivered via phone, a company intranet, newsletters, regular visits by a representative from the corporate office, regional meetings and annual conventions;
- Owning a franchise provides a small business with brand identity - customers recognise the brand and are able to associate your franchise business with the brand which is key to quickly establishing a customer base;
- Franchisees benefit from the franchisor's marketing expertise - the franchisor provides regular updates on marketing strategy;
- Centralised purchasing is a feature of many franchises - franchisees may benefit from cheaper goods and supplies when buying is done in bulk through a centralised purchasing function managed by the franchisor.
Franchising is a good way for individuals to own and operate their own business since it allows entrepreneurs to be in business for themselves, but not by themselves. With a franchise business there is already a proven business formula in place: the products and services and business operations have already been set up and proven in the marketplace. Since the business model has already proven to be successful, there is a better chance of a franchise branch succeeding compared to starting a brand new business.
Investing in a Franchise
Buying a franchise is a significant investment so it is important that you understand exactly how franchising works, what fees are involved, and what is expected of you from the franchisor. Seeking independent advice before buying into a franchise business is prudent.
To invest in a franchise, the franchisee must pay an initial fee for the rights to the business. After that, the franchisee will usually pay the franchise owner an ongoing fee, either on a monthly or quarterly basis. The fees are in return for the management services provided by the franchisor, the products and materials ordered from the franchisor and marketing fees. Within the agreement the fees may be set out individually and possibly with different payment periods e.g. the marketing fee could be an annual fee with the others being monthly.
In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services.
Generally, the business model for each franchise is the same and the franchisee must follow certain rules. Each franchise is owned and operated by the franchisee but the franchisor controls the way in which products and services are marketed and sold, and the quality and standards of the business. For example, the franchiser will require the franchisee to use the uniforms, business methods, and signs or logos of the business. The franchisee will also usually have to use the same or similar pricing. The franchisee is buying not just the right to sell the franchiser's product, but also the right to use the successful and tested business process and must apply the model as set out by the franchisor.
The Franchisee manual
The Franchisee Manual is an integral part of establishing a franchise. It is the operations manual, the 'working bible', for the franchisee and provides the franchisee with detailed information on the working methods and practices of the franchise. The details set out in the manual create a uniform framework to ensure consistency throughout the franchise network as well as a benchmark for assessing standards.
Depending on how well established the franchise network is, the franchisee manual may be a relatively short document or hundreds of pages long (the McDonald's operating manual is reputedly over 600 pages long). Whatever the size or age of the franchise network, the franchisee manual should be regularly reviewed and updated by the franchisor.
The following information should be included in the Franchisee Manual:
- Contact details for staff at Head Office and other network outlets.
- The methods and procedures to set up an outlet including the design and lay-out of trading premises, staff uniforms and necessary equipment.
- Contact details for suppliers.
- Marketing techniques and style.
- Systems for operating the business including contract documentation that the Franchisee will be expected to use.
- Quality standards required by the Franchisor and the key indicators used to monitor and maintain them.
- Franchisor's obligations including day-to-day support and training.
- Franchisee's obligations including maintaining performance, employing staff, training staff, record keeping and dealing with customer complaints.
- Price guides for stock, services and other relevant items.
- Opening hours.
The Manual can be in hard copy or electronic format and should be updated regularly.
This franchise agreement template is suitable for use by a UK (England, Scotland and Wales) based business. Clauses included cover:
- Franchisor's responsibilities
- Franchisee's responsibilities
- Intellectual property
- Territory of the franchise
- Duration and renewal of the franchise
- Standards and training
- Transfer of the franchise
- Confidentiality restrictions
- Competition restrictions.
In addition to the Franchise Agreement, the Franchisor should also provide each Franchisee with a Franchisee Manual. This Franchise Agreement template contains guidance notes on what should be included in the Franchisee Manual.