In particular, signing a franchise agreement in the UK works in the following way. Once the agreement is signed, provisions of the agreement become legally binding. The franchisee is given the right to operate under the parent brand’s name, using their intellectual property, brand and systems, while the franchisor is entitled to receive payments (the one-off franchise fee, royalty payments, marketing levy and others) for granting the franchisee these rights. The franchise agreement works for the duration of the business relationship established and set out in it between the parties.
It also sets out what each side’s roles and responsibilities are, in addition to defining key aspects of the relationship such as exclusive territory rights, future or premature termination of the agreement and numerous other clauses.
There are four main types of franchise agreements. These are the single-unit, multi-unit, area development and master franchise agreements.
The primary distinction between the single-unit and multi-unit franchise agreements relates to the number of franchise units a franchisee can own and operate. With the single-unit agreement, the franchisee can only operate one unit, whereas with a multi-unit agreement they have more freedom to operate multiple units.
Regarding the master franchise and area development agreements, these relate to the development of the franchise into new territories and areas. Whereas a master franchise agreement is usually reserved for franchisees that seek to develop international locations, which they will also play a role in facilitating and overseeing, an area development agreement deals with the development of a particular area that is usually much larger than what is allocated to a franchisee who has signed a single-unit franchise agreement.
The key points of a franchise agreement include but are not limited to the following terms of the agreement in no particular order:
For those of you wondering how long is a typical franchise agreement, it is worth noting that the answer will vary depending on the particular franchisor you choose to partner with. According to general industry averages, the term can range anywhere from three to 20 years, although there are instances of franchise agreements lasting for as long as 25 years. However, in the UK, the standard time frame for a franchise agreement is five years with the option to renew. In the case of renewal, some franchisors waive the franchise fee paid at the beginning of the business relationship, while others require either a small percentage of the franchise fee or the full payment of the fee. The five-year period is a popular one because it enables franchisees to earn a return on their investment and to repay any loans they may have taken when initially investing in the franchise operations.
If a franchisee has performed in terms of their franchise agreement and the term for franchise agreement renewal approaches, it is important for both the franchisor and franchisee to carefully review the renewal clause in the franchise agreement.
In some cases, a franchisee may wish to renew their agreement for a further period of time. In this situation, they can either sign the same agreement that they signed before or they can sign a new agreement that has been updated to include new terms and conditions.
Sometimes, the franchisee may wish to sell their business. Frequently, they will offer their franchise for sale back to the franchisor, although there are other instances where they may sell to a family member, an employee or someone else. However, the franchisee will be required to comply with the terms for selling their business in terms of the conditions set out in the franchise agreement. This will mean following the correct procedures for franchise resales, marketing, generating leads and more.
Finally, there are cases where the franchisee does not wish to extend or renew their franchise agreement and it together with its provisions will lapse once the term has expired.
Although relatively uncommon, it is possible to terminate your franchise agreement prior to the expiration date. It is important to note that this decision will be governed by the clause related to breach of franchise agreement. There may be various reasons for this and it is best to ensure that both parties adhere to the conditions set out in the franchise agreement when terminating it. If you want to cancel a franchise agreement, you will have to follow the procedures set out in the agreement itself in such a scenario. These will be the guiding principles upon which early termination should be carried out.
Whereas there are cases when franchisees terminate a franchise agreement, you may be curious about whether a franchisor can terminate a franchise agreement. In short, the answer is “yes”. It can be due to non-performance, non-compliance, breach of the franchise agreement terms, working for a competitor company, damaging the reputation or brand of the franchisor and others.
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