Franchise Agreement: What is it?

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A franchise agreement is a legal contract that exists between a franchisee and a franchisee. In most cases, the franchisor is the company that owns and operates commercially branded facilities, using a specific set of standards and processes for each of those locations. A franchisee is an individual or business that wishes to do the same type of branded operation as the franchisor, using the same strategies and standards that apply to company-owned facilities. There is no single model for a franchise agreement that is used in all situations, although any such agreement must comply with local laws and regulations.

The details included in a franchise agreement often vary, based on the type of business involved. This means that the contract for a fast food franchise is usually a little different than a cleaning franchise or a golf franchise. While each agreement will include basic elements such as the costs that the franchisee will pay to receive the right to use the franchiser’s name, the type of support in terms of training and access to goods and services that the franchisee needs, and the standards that the franchisee must follow to maintain the relationship, the specifics that are unique to that particular situation will also be documented in the franchise agreement.

For example, virtually any franchise agreement will address the issue of royalties that the franchisee must pay the franchisor. How royalties are assessed and when they are due will vary from situation to situation. Likewise, the level of ongoing support that the franchisor provides to the franchisee will be detailed in the terms of the agreement, including access to management training programs and standards for training new hires generally. In most cases, the agreement will specify which partner pays what type of taxes in connection with the local operation and what happens if one of the partners fails to pay those taxes in a timely manner.

Many companies that offer franchise opportunities place high demands on any prospective franchisee and include those requirements in the terms and conditions contained in the franchise agreement. This is especially true with fast food franchises, where the franchisee is generally expected to build a facility that follows a floor plan approved by the franchisor. The franchisee must also provide employee training using training materials provided by the franchisor and even require employees to wear uniforms approved by the franchisor. It is not unusual for fast food franchise owners to also purchase food products from suppliers approved by the franchisor and even prepare such foods according to processes specified by the franchisor.

This detailed approach helps maintain the quality provided by all franchisees affiliated with a given franchisor. The inclusion of these requirements in the franchise agreement leaves no doubt as to what each partner brings in terms of resources and effort and clarifies what they expect from both the franchisor and the franchisee. At best, a franchise agreement sets the stage for a long-term relationship that benefits both parties.

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