One of the most important documents for a franchise business is the written agreement between a franchisor and a franchisee. Commonly known as a franchising agreement it will be a formal contract between 2 parties which will set out expectations and obligations for both parties.
As franchising specialists there are several questions which often get asked about what to include in a franchising agreement, so here are our recommendations:
The Expectations
There will be some specific expectations that a franchisee will need to comply with. To begin with this will be the day-to-day steps to successfully run the business along with outlining what can and cannot be done. Details on intellectual property along with any relevant trademarks or copyrights needs to be clearly defined.
Both parties need to be fully clear and aligned to ensure that they are both happy with the agreements. Any causes for concern or limitations should be addressed and resolved at the outset to ensure that they do not become barriers in the future.
The location
A franchisee will be assigned a specific location or territory. They must be fully versed on its boundaries and understand what is and what is not included. The location will be fixed so a franchisee will be given solid market research on demographics, side of market, potential client base and competition within the region.
A franchisor will choose between either an exclusive or a non-exclusive location. The difference between the 2 is that an exclusive agreement means only 1 franchisee can operate in that location. A non-exclusive agreement means there are no location restrictions and more than 1 franchisee can operate in the same area.
The Fees
Probably the most important aspect of the agreement for both parties. The fees section will show what initial outlay is required to invest in the franchise and what ongoing costs or royalties are expected. Both parties need to fully understand the fee structure, there should be full transparency and if there are any concerns these need to be resolved before the agreement is finalised.
The Renewals
Any agreement put in place should have a clear timescale which allows for a renewal period. The initial agreement will have a set period that it runs for which can only be changed if there is a breach of contract or both parties decide to end the partnership early.
Having a renewal cycle in the contract means both parties know when a review is due. They can keep an eye on performance and if anybody has concerns these can be aired before an updated contract is agreed.
The Exit
It might sound like an odd option for an exit plan to be included in a new agreement, but every business owner will state how important an exit strategy is. This will set the terms on which the agreement can end. It is not uncommon for penalty fees to be included if a franchisee wants to end the relationship early.
Both parties need to be happy with the exit plan.
So, in summary a franchising agreement becomes a binding contract between a franchisor and a franchisee.
If you have any questions or would like some help with developing a franchising agreement, please call us on 01993 706403 or e-mail hello@ngifranchisefunding.co.uk.