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Understanding the Franchise Agreement

This guide will uncover important aspects of the franchise agreement, including different types. This will provide you with a deeper understanding of its terms and prepare you for the next step in your franchising journey.

the franchise agreement

Why Should You Know What the Franchise Agreement Is?

The franchise agreement legally binds both the franchisor and franchisee to terms and conditions set out in the contract.

The key features of this agreement would include the franchisee taking on the branding of the franchisor, as well as any operational processes related to marketing, products, and services – among other elements.

For these reasons, franchisees need to abide by a strict code of compliance and operating processes set out by the franchisor, and this would result in limited changes being introduced to the franchising system. As such, having an agreement to lay out these terms and conditions is crucial and can help with clarifying any doubts prior to going ahead and investing into a franchise.

As per the Australian Franchising Code of Conduct, also commonly known as the Code, it is a requirement that every franchisor provide a franchise agreement to their respective franchisee to outline the obligations and rights within the business arrangement.

Clearly stating these would assist in ensuring that the terms of the agreement are abided to and are implemented in your daily business operations, and it can assist with monitoring and mitigating risks, as and when they arise.

If you are new to franchising, understanding the different types of franchising agreements is key to running your operations smoothly. There are several different franchising agreements in the Australian market which can suit the requirements of your and a franchisor’s needs. These include:

Basic franchise agreements (single-unit agreement)

This includes information such as the rights of the business, the fee or payments involved, the goods or services under a specified system or marketing proposal. This would also include any trademark, commercial symbols, and licenses that the franchisor permits the franchisee to use.

Master franchise agreements

A master franchise agreement allows a franchise to act as a franchisor. This agreement gives rights to a master franchisee (usually in a geographical context of national or regional-level rights) to grant franchisees a single-unit franchise.

Thus, this type of agreement is often seen if you are partnering as a franchisee for a new brand seeking to enter the market nationally or regionally and is great for international or interstate expansion.

Area developer agreements (multi-unit agreement)

This is essentially a master franchise agreement, but within a specified area and within a given timeframe. An area developer will be appointed in this type of agreement, and there are several performance indicators stated within the agreement to gauge the area developer’s success, amongst other criteria.

Area representative agreements or master agent agreements

This type of agreement does not directly grant rights to franchises. Instead, there will be a third-party agent who will be involved in recruiting and training franchisees and providing oversight to the franchisees in an area in exchange for a fee. This is a good option for franchisors looking to expand rapidly and to rely on an expansion partner with expertise and area expertise on hand.

What Are the Key Elements that You Can Find in a Franchise Agreement?

what to expect

Now that you have a brief understanding on the different types of franchising agreements, let’s go over the key elements you can find in a typical franchise agreement.

Trademarks and their usage

Trademarks such as a brand’s logo, slogan and brand colours are a fundamental component you can find in even the most basic of franchise agreements.

It is crucial to include this in the agreement as it outlines the trademark materials which can be used, and any rights associated with how it can used in relation to the services and products of the brand. A company which explicitly includes this element in its franchise agreement is 7-Eleven.

Territory rights and location of the franchise

This would include any customisations that can be made to the branding within the limits of the territory, as well as the post code areas referring to the locations of a franchise.

A brand which applies the franchising model and includes this in its franchising agreements is Anytime Fitness. The brand provides advice to potential franchise owners on location services as well as a site criteria form which meets the requirements of the brand and of the potential franchisee.

Advertising standards

As part of writing up a franchising agreement, a brand must include terms relating to how advertising is carried out by the franchisee. This would include advertising, internal KPIs and other marketing related elements. For example, KFC Australia has its own advertising co-operative known as KFC Adco Limited.

This arm of KFC Australia manages the advertising and marketing processes, governing advertising contributions that franchisees make under the terms of their agreements.

Restrictions placed on the products and services

Brands may have several restrictions placed on the type of products or services that can be sold by franchisees.

This is explicitly written in the franchising agreement, and it is also mentioned in the franchising information sheet for many brands.

Take Lord of the Fries for example, a growing urban vegetarian/vegan fast-food chain which provides future franchise owners with not only the business concept, but detailed instructions on their products and packaging.

If you have a burning idea to introduce a viable innovation to the list of products or services to the brand you intend to franchise on, then you may speak to the franchising representative with your idea.

Renewal, termination, and transfer of the agreement

It is important for a franchising agreement to clearly lay out what happens when a franchising agreement’s term is completed.

Often, a franchising agreement is set out between 5 to 10 years for its term. In many cases, if a franchisee fails to renew their franchise contract, it can be deemed as a breach to the franchise agreement, which would result in termination.

Terms of the franchise

Subway is a brand which clearly states out its term of franchise, from ownership, to limit on liability, to severability.

Understanding this as a new franchise owner is useful, so that you can negotiate (to an extent) and chart your way through the franchise agreement accordingly. If you are interested in a brand which does not have its terms and conditions of franchise readily publicly available, then it is wise and best practice to reach out to them to understand this.

Obligations and duties of the franchisor

There are various obligations – financial, marketing, and operational - that a franchisee and franchisor must agree upon and maintain throughout the term of franchising agreement.

These can include royalties, monthly or quarterly reporting and implementing training for the franchise’s staff.

An example of this is stated out in Domino’s franchising website, whereby a franchisee is obligated to contribute a regular royalty fees of 7% of the total gross sales. They also need to contribute a maximum of 6% of overall sales towards national advertising.

If you want further clarification or advice on how you can manage and keep up with these obligations, then you should reach out to the franchisor, franchisees, and experts once you’ve reviewed the initial agreement.

Being more informed will always be in your best interests!

Take the Next Step and Become a Franchise Owner

While it can seem overwhelming at first, reviewing your franchise agreement is key to ensure a smooth launch for your franchise store.

It is important that you conduct your due diligence and understand your rights as a franchisee when entering into a franchise agreement.

You can also seek advice from accounting and legal professionals if need be. It is advisable to reach out to franchising representatives from your intended franchising brand as many times as you’d like if you have any doubts.

We wish you the very best of success on your new franchising journey. If you have any questions about franchise agreements or you’d like to speak to someone, feel free to do so here!