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Franchise agreements are used extensively within the retail sector.
It is important to understand how these agreements work and what they will mean for the parties entering into them.
A franchise agreement is a legally binding contract that establishes a relationship between a franchisor (the business owner) and a franchisee that outlines the terms and conditions of their business relationship.
Essentially, under a franchise agreement, a franchisor provides a licence to the franchise (in return for a fee) to use its intellectual property, branding and business system.
Typically, the agreement allows a franchisee to establish a franchise location and provides the right to use franchise-specific resources (for example, branding, business models, and supply sources).
The agreement will also provide a framework for the franchisor to maintain its intellectual property or branding and allow for the franchisee to benefit from a proven business concept.
The agreement also protects the rights of both parties if the relationship breaks down or if one party does not comply with the agreed terms.
Types of franchise agreements
There are different types of franchise agreements that typically arise in the retail sector; these include:
- A single-unit franchise agreement. This is where a franchisee is granted the right to operate a single unit or location of a franchised business. This agreement outlines the terms, conditions, and obligations, including fees and operational guidelines, for the specific franchise unit;
- A multi-unit franchise agreement. This allows a franchisee to operate multiple units or locations of a franchised business within a defined territory. This agreement often includes a development schedule and financial commitments;
- An area development franchise agreement. This grants a franchisee the right to open and operate multiple units within a specified geographic area. These agreements grant territorial exclusivity and allow the franchisee to expand the brand’s presence in the designated territory;
- A master franchise agreement. Involves which grants a franchisee the right to operate as a franchisor within a specified territory. The master franchisee assumes responsibilities such as recruiting and supporting sub-franchisees, helping to expand the brand in a particular region, and often sharing in the fees and royalties generated by sub-franchisees.
Practical matters to consider
Navigating your way through a franchise agreement can be a difficult and daunting experience, so please contact our retail specialists for support during this process.
Franchise agreements are negotiable, but the degree of which can vary depending on the type of agreement it is, and also who the agreement is being made between.
Franchisees will often aim to secure terms that enhance their profitability, whilst franchisors want to protect their brand integrity and retain control over the activities of the franchisee.
Successful negotiations allow for open communication and collaborative approaches between both parties.
Any negotiations are usually made with the shared goal of creating a successful and mutually beneficial partnership between the franchisor and franchisee.
Seeking legal advice to assist with this negotiation process is crucial to ensure that any adjustments are made in the interests of both the franchisor and the franchisee.