25th March 2025 ❘

Franchisee Legal Insights: The key aspects of franchise agreements for a Franchisee

The key aspects of franchise agreements for a Franchisee

Franchisee Legal Insights: The key aspects of franchise agreements for a Franchisee

Continuing our series of news pieces from our Franchising team, here’s the next instalment: A piece from our Corporate Partner Jennifer Bell on the key aspects of franchise agreements for a Franchisee… 

Starting your own business can be an exciting, but extremely daunting, prospect.  For many people, purchasing a franchise can ease a number of stresses and provide a very attractive pathway to success.  By purchasing a franchise, business owners can tap into an established brand, proven systems and ongoing support.  However, while franchising comes with significant advantages, it does require careful consideration of the terms laid out in the franchise agreement.

The franchise agreement serves as the foundation of the relationship between the franchisor and franchisee.  Understanding the key aspects of this agreement is crucial for anyone considering this route.

Franchise agreements are usually drafted heavily in favour of the franchisor which is entirely normal given that they will want to protect their brand from unauthorised use.  The agreements are often drafted on a “take it or leave it” approach, however despite this it is vitally important that a franchisee seeks specialist advice on the contents of the agreement to ensure that they understand their rights and obligations and to ensure that what they believe they have agreed is correctly reflected in the contract.

Key terms in the Franchise Agreement

  • Fees and royalties – the agreement will define any fees that the franchisee will pay to the franchisor, prior to opening the franchise business. This can include the initial franchise fee paid to the franchisor at the time the agreement is signed, plus any amounts needed for materials, stock and training.  There will also likely be ongoing fees or royalties based on either a percentage of gross revenue or a set monthly fee.  Whatever the fee structure is, it is important to ensure that what is drafted reflects what has been agreed.  Another important point is that royalty fees are often paid on a percentage of turnover rather than of profit, which means a franchisee will still be required to make payments even when the business itself might be making a loss.

  • Territory – the agreement will specify the area in which the franchisee will operate. This can either be exclusive, which will limit the franchisor’s ability to open another location within the same area, or non-exclusive which allows the franchisor to open other branches within the territory thus potentially diluting the franchisee’s market.  It is therefore key to understand what is being offered as this can affect the future profitability of the business.

  • Term and termination – franchise agreements are usually for a fixed term which can range anywhere from five years to 20 years. They will also set out a number of grounds upon which the franchisor can terminate the agreement, such as breach of certain obligations and the occurrence of various insolvency events. Franchisees usually have a lot fewer grounds to terminate the agreement before expiry of the fixed term.  It is therefore important to understand the commitment being made before entering into the agreement as it is unlikely that there will be an easy exit route.  It is also important to ensure that the term of the agreement aligns with the franchisee’s business plan to allow the franchisee to recoup their investment.

  • Rights granted over the marks – these provisions will outline how the franchisee can use the franchisor’s trademarks or logos, as well as the restrictions placed upon such use. It is also common for the agreement to require the franchisee to adhere to the provisions in the brand manual.  It is important to note that the brand manual is a living document which the franchisor will continually update.  The franchisee will therefore not know the full extent of its obligations on day one.

  • Future sale of the business – whilst the franchisee will usually be entitled to the business, in order to protect the franchisor’s intellectual property, it will want to have a degree of control over what happens to the business if the franchisee wishes to exit. One option to exercise this control is for the agreement to grant the franchisor the right of first refusal to buy the business itself.  If it does not exercise this right, the agreement will usually contain the ability for the franchisor to approve the prospective buyer making the ability to sell harder.

Franchise agreements offer entrepreneurs the opportunity to operate a business with the backing of an established brand and business model.  The key aspects of these agreements help mitigate risk and provide franchisees with a structured environment to grow their business.  However, these benefits do come with a number of disadvantages such as limited autonomy, ongoing financial obligations and a dependence on the franchisor’s decisions.  Before entering into the agreement, it is vital for a franchisee to carefully review and understand the rights and obligations.

If you are looking to purchase a franchise and need legal assistance to review the franchise agreement please contact Jennifer Bell, Partner in our Corporate team and she will be happy to help you.