Franchise Definition: Everything You Need to Know
A franchisee will generally make a one-time payment to the franchisor as a fee, followed by a set percentage of the sales revenues they generate as a result. 3 min read
2. Why Use a Franchise?
3. What Are the Legal Aspects of Franchising?
4. How Long Does a Franchise Contract Last?
The franchise definition is an agreement between one party, known as the franchisor, and other parties, known as franchisees, to whom the franchisor grants the right to use their trade-name or trademark, along with certain related business processes and systems.
This benefits both parties, as it allows the franchisor to make additional income for their brand, and the other parties to benefit from using, producing and/or marketing an established brand, product or service to known specifications.
What's the Benefit of a Franchise?
A franchisee will generally make a one-time payment to the franchisor as a fee, followed by a set percentage of the sales revenues they generate as a result. This acts as a royalty payment to the creator of the trade-name or trademark. In exchange for this payment they gain several things:
- Instant name recognition
- A product or method that has been tried, tested, and proven
- A standard design for their design and/or décor
- Details of specific techniques used to run and promote a successful franchise business
- Employee training
- Ongoing support in the promotion of their business and ongoing upgrades to product and service lines
Meanwhile, the franchisor enjoys some great benefits too, including rapid business expansion and an increase in earning with a minimum outlay of capital.
Why Use a Franchise?
Franchising is an extremely popular method for starting a new business, particularly for individuals who want to break into an industry that's highly competitive. Fast food franchises like McDonalds and Subway are fine examples of a franchise in action. Its greatest advantage is the ability to gain access to the brand name of an established company simply by purchasing a franchise.
Brands take months and years of long, hard, expensive work to build. Being able to start a business that has instant brand recognition is a huge benefit, cutting out a lot of the trial, error, and effort that generally goes into a startup.
A franchise allows a new business venture to invest its resources and capital into growth and other areas, rather than being forced to think the majority of it into the development of a product, service, name, or customer base.
What Are the Legal Aspects of Franchising?
Legally speaking a franchise is a form of licensing agreement, however, at its core, the concept of franchising hinges on the relationship between a franchisor and their franchisees. While the franchisor commits to allowing the franchisee access to and use of their methods, products, business model, branding, and intellectual property.
The franchisees, meanwhile, are bound to abide by certain limitations, specifically regarding the manner in which they will operate their business. The contracts for franchising are often complex and varied. They go far beyond a simple stipulation of payments to be made and can stipulate limitations and requirements.
Where payment is concerned, the franchisee must first purchase the rights to use the controlled rights and trademark of the franchisor, followed by further payments to cover the cost of training, business advice, equipment, and other related and necessary aspects of running the business. Finally, there are ongoing royalty payments in the form of an arranged percentage of revenue.
Legally, the franchise agreement is required to be clear in its stipulations and fully disclose all expenses and fees that will be incurred on the part of the franchisee. It is also a requirement to state if there is litigation history associated with the franchise, and provide a list of any approved businesses acting as vendors or suppliers.
The agreement should also include an estimate of the financial performance the franchisee can expect, as well as other details.
How Long Does a Franchise Contract Last?
Franchise contracts are temporary, and function in a similar manner to a rental or leasing agreement. In this case, rather than renting a property you are essentially leasing the business. The franchisee does not own the brand or business they are 'renting' any more than a tenant owns the house they rent from their landlord.
The length of the contract depends on the specific franchise contract, however, they usually last between five and 30 years. In the event a franchise agreement is prematurely terminated, the franchisee may bear serious consequences or penalties. Violating the terms of the franchise agreement can serve to prematurely end it.
If you need help with franchising, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.