March 14, 2023
Intellectual property is big business. And, in the case of a franchising arrangement, it’s crucial to have legal infrastructure in place to protect the intellectual property rights of your business, its branding and its use. Enter, the franchise agreement. In simple terms, franchise agreements regulate the relationship between a franchisor and a franchisee. Pretty simple, right?
Well. Not quite.
There are a number of nuts and bolts to figure out when it comes to franchise agreements, from what to include, to the types of protections they provide.
That’s why we’ve dived deep into these powerful agreements to equip you with the hard facts. We’ll tackle what exactly a franchise agreement is, the rights that come with it, the risks of not having one, and what franchise agreements need to include. Ready? Let’s get started.
A franchise agreement is between a franchisor and a franchisee and defines the terms under which a franchisee can operate and use a brand. This agreement allows the franchisor to control how a brand is used, enforce standards of performance under the brand name, and limit certain uses of the brand which could prove damaging.
Through the agreement, the franchisee receives the rights to operate a separate company using the brand and operating model of the franchisor. Famous examples of a franchise include McDonald’s, Domino’s, and Starbucks.
For many, running a business is a fervent dream. And yet, the failure rates of startups are inordinately high, with an estimated 60% of small businesses destined to fail in the first three years of life. Yikes. A franchising arrangement can provide the opportunity to run a business, under the umbrella and proven business model of a franchise. The product, service, processes, and branding have been proven elsewhere to work, and for a franchisee, it can often mean their business has immediate brand recognition, an existing customer base, and a route to market. However, it’s important to note - a franchise agreement should acknowledge that the franchisor is under no obligation to make a franchise financially viable. Or, in simpler terms, you can take the horse to water, but you can’t make them drink it.
For the franchisor, a franchising arrangement can provide a new source of income in addition to expanding the business without needing to run the franchises themselves. However, it’s not a free-for-all. A franchising agreement will be used to very clearly set out what is, and isn’t okay, and where needed, to stipulate areas of assistance a franchisee may need.
Before diving further into the detail - what exactly is a franchisor? Put simply, a franchisor is an individual or business that grants a franchise to hopeful parties.
A franchisee is someone who secures the opportunity to operate a franchise, with permission from the franchisor.
As a franchisor, the integrity of your brand is crucial. From its intellectual property to its reputation on the market, you’ll want to retain some control over how your brand’s name and identity are used. For example, let’s say someone scoops a license to be a franchisee of McDonald’s. However, they park the burgers, and overhaul the menu entirely, in favour of fruit, veg, and kombucha. Not only would it confuse customers, but it would also directly contradict the brand that McDonald’s has worked hard to build - and protect. The franchisee would be misrepresenting the franchisor’s identity, running the risk of brand damage in the process.
As a franchisor, you need an agreement in place that defines your rights as the owner, your obligations as a franchisor, and the limitations placed on your franchisees. Without it, you may find defending your brand an expensive challenge.
There’s no “one size fits all” franchise agreement and it's important for franchisors that the agreement appropriately defines, protects, and bolsters their rights. Below, we tackle some of the key areas to focus on.
Your franchise agreement will need to address the rights of the franchisor and franchisee, from the use of intellectual property to trade mark licenses and leases. Similarly, your agreement will need to acknowledge the risks of taking on a franchise and assert the onus of the franchisee to make the business work.
Your agreement will want to address the obligations of the franchisor, from providing general advice to providing equipment, training, branding guides, and promotional materials. This includes providing information on how the franchise should be run, core information related to the product or service, and access to procuring the product or service.
Next up, the franchisee. The agreement will need to address the obligations of the franchisee, from operating the franchise in accordance with the agreement to preventing any scenario whereby the franchisor’s brand would become damaged.
Given the scope of legal rights, obligations, and pitfalls, your franchise agreement will likely cover other areas, including:
A franchise agreement puts in clear terms the rights and obligations of a franchisor or a franchisee. As a result, it equips a franchisee with licensing rights, prevents communication breakdowns, and acts as a point of reference in the event of a dispute. Put simply, you can’t go far without one, and your brand and its identity are phenomenally vulnerable without a robust franchise agreement in place.
This is one of those agreements you don’t want to use a template for. Your brand, its value, its intellectual property, and your control over it, is hard-earned, and it doesn’t take much to damage everything you’ve worked hard to build. By looping in legal experts early in the process you can ensure you get the best-case scenario, backed by expert legal advice.
Considering a franchise agreement? Or just in need of legal advice as a franchise owner? Discover how we can support you with a fit-for-purpose agreement.