What is a Franchise Agreement?

A franchise agreement is a legal contract that exists between a franchiser and a franchisee. In most instances, the franchiser is the corporation that holds and operates facilities under a name brand, utilizing a specific set of standards and processes for each of those locations. A franchisee is an individual or business that wishes to run the same type of operation under the brand of the franchiser, employing the same strategies and standards that apply to the corporation owned facilities. There is no single template for a franchise agreement that is used in all situations, although any agreement of this type must be in compliance with local laws and regulations.

The detail included in a franchise agreement often varies, based on the type of business operation involved. This means that the contract for a fast food franchise is usually a little different from a cleaning franchise or a golf franchise. While each contract will include basics like the costs that the franchisee will pay to receive the right to use the name of the franchiser, 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 in order to maintain the relationship, specifics that are unique to that particular situation will also be documented in the franchise agreement.

For example, just about any franchise agreement will address the issue of royalties that the franchisee must pay to the franchiser. How those royalties are assessed, and when they are due will vary from one situation to another. In like manner, the level of ongoing support that the franchiser gives to the franchisee will be detailed in the terms of the agreement, including access to management training programs, and standards for training new hires in general. In most cases, the agreement will specify which partner pays what type of taxes in regard to the local operation, and what happens if either partner fails to pay those taxes in a timely manner.

Many businesses that offer franchising opportunities require a great deal from any potential franchisee, and include those requirements within the terms and conditions found in the franchise agreement. This is especially true with fast food franchises, where the franchisee is usually expected to build a facility that follows a franchiser approved floor plan. The franchisee must also provide employee training that makes use of franchiser-provided training materials, and even require employees to wear franchiser-approved uniforms. It is not unusual for fast food franchise owners to also purchase food items from suppliers approved by the franchiser, and to even prepare those foods in accordance with the processes specified by the franchiser.

This detailed approach helps to maintain the quality provided by all the franchises affiliated with a given franchiser. Including these requirements in the franchise agreement leaves no doubt as to what each partner brings to the table in terms of resources and commitment, and makes it clear what both franchiser and franchisee expect from one another. Under the best of circumstances, a franchise agreement lays the foundation for a long-term relationship that benefits both parties.