Franchise Agreement

When you find any franchise opportunities and buy into a franchise system you sign a franchise agreement that spells out precisely what you are buying. You could be buying one franchise store or possibly the right to build several store locations. You also may be looking to buy the rights to own all the stores in a particular geographic area. If you really want to think big you not only can buy the rights to a geographic area, but you can also buy the rights to sell franchises to others in your geographic area.

Each of these structures involves a different type of agreement. The offers to buy a franchise must comply with the Federal Trade Commission’s standards for a Uniform Franchise Offering Circular (UFOC), but even under the rules of the UFOC there are different types of franchise agreements you can be offered. These agreement types include single-unit franchises, multiple single-unit franchises, area-development franchises, and master franchises. The following sections briefly review each type.

Single-Unit Franchises

If you just want to own and operate one store or franchise unit, then you would sign an agreement for a single-unit franchise. This is the simplest form of franchise ownership. Not all franchises are storefronts. For example, service franchises, such as Chem Dry (a carpet-cleaning franchise) or Maid Brigade (a house-cleaning franchise) are usually run from someone’s home without any storefront at all. The most common way customers find these franchise owners is through advertising in the telephone book or in local newspapers. Again, the brand name is the selling point.

Multiple Single-Unit Franchises

Successful franchisees often look to buy more than one franchise unit from the same franchisor. For example, that GNC retailer of nutritional supplements at your local mall may also own the GNC in the mall a few miles away. It’s not unusual for a franchisee whose first unit proves profitable to sign a second agreement with the same franchisor for another location. This would be called a multiple single-unit franchise agreement.

Because the business owner is already familiar with the operation and the people involved, she fully understands the potential for another similar franchise unit and can get that second (or maybe third) unit up and running much more quickly than trying to buy a different type of franchise. Both the franchisee and the franchisor benefit from the quicker start-up with less initial costs and time for training. What’s more, the operator may be able to promote some of her current staff to management roles in the new unit and get it off the ground more smoothly.

However, even though the agreement and method of operations for the franchise will he nearly identical, there could be some differences in the terms for each new unit. As franchises grow and become more popular, you will usually find fees are higher, different equipment may be required for start-up, or initial investment requirements could increase. Although the franchisor might not require its older franchisees to upgrade to state-of-the-art equipment, there is a good chance the franchisor would require the franchisee thinking of buying another unit to sign a new agreement that includes any new provisions.

Area-Development franchises

Some successful franchisees decide they’d like the right to build more than one unit at a time. ‘They’ve determined that this is the right franchise system for them and they don’t want to risk the possibility that another franchisee opens a unit in their area.

To avoid the possibility of someone else invading their turf, the successful franchisee can negotiate an area-development agreement. Instead of signing just a single-unit agreement each time he’s ready to begin his next development process, the franchisee can protect his rights to build a number of units in a particular geographic area by a set date and time. As the franchisee gets ready to develop each of his units, he will still need to sign a unit-development agreement, which governs the terms for how each unit will be run and the franchise fees for the unit.

For example, the franchisee could promise the franchisor that he will develop 10 uniF., in the Atlanta metropolitan area within five years. The area-development franchise agreement would include a schedule for building those units. If the franchisee can’t maintain that schedule, he will likely lose the rights to develop all the units and probably lose his development fee. Most franchisors have a provision in the area- development agreement that specifies it can cancel the agreement if the franchisee fails to meet the specified development schedule.

Franchisees pay a fee for area-development rights. Many times a portion of this fee is credited toward each unit fee as the units are developed, but that’s not a guarantee. Each franchise system deals with the fee structure differently. Some require that you still pay the initial franchise fee in full, even if you’ve paying an area-development fee. Others offer a reduced fee for each unit if you hold area-development rights. Remember, each franchise system is a unique business and can determine its own terms for operating. I can’t emphasize enough how important it is for you to seek professional guidance from an attorney who specializes in franchise law before entering into any franchise agreement.

Master Franchises

The highest step on the rung for a franchisee is a master franchise agreement. With this type of agreement the franchisee not only gets the right to develop a certain number of units within a geographic area, he also gets the right to sub franchise or sell the franchise to other franchisees.

The master franchise agreement is similar to the area-development agreement. The master franchisee agrees to develop a set number of units in a particular geographic area within a set time period. The key difference is that the master franchisee won’t likely develop all those units himself. Instead, he will find others to develop some of the units. In fact, some master franchise agreements require the master franchisee to find others to develop individual units.

Most master franchise agreements require the master franchisee to open and operate at least the first single unit themselves, and in most cases require the master franchisee to own and operate at least two of the units in his area. Once he has those up and running, he then gets the right to sell additional locations in his area to other franchisees, which are called sub franchisees.

Master franchisees pay a fee when they sign the master franchise agreement. Then as the franchisee either opens his own units or sells units, he will need to pay additional fees. Just like the area-development agreement, the structure for these fees will vary depending on the terms set by the franchisor. The most common arrangement is that the master franchisee will share the income from the single-unit franchise fee with the franchisor as each franchise is sold. The percentage each gets varies widely from franchise system to franchise system.

These sub franchisee agreements can be structured in several different ways:

1. An agreement may be signed directly between the master franchisee and the sub franchisee.

2. An agreement may be signed directly between the sub franchisee and the franchisor.

3. The franchisor may hold the right to approve all sub franchisees.

4. The master franchisee may hold the right to approve all sub franchisees.

5. Training may be provided by the franchisor, or the agreement may specify the master franchisee has full responsibility for training, or there could be a shared responsibility for training sub franchisees.

6. The fees for the single-unit agreement may be paid directly to the franchisor, directly to the master franchisee, or the payment of the fees may be split, with some going to the franchisor and some going to the master franchisee.

Again, I must remind you to contact an attorney before entering into this most complex type of franchise agreement.

You probably won’t find many master franchise agreements available in the United States because most franchisors prefer to have a direct relationship with each of its franchisees. However, you are more likely to find master franchise agreements for international development. Franchisors who seek to develop franchises in another country do prefer to designate one master franchisee to develop the units in that country. They realize that cultural, political, and economic differences make it critical to have someone lead their franchise unit development in each country that has significant experience developing businesses in the target country. So if you’ve lived and worked for a long time in another country and think there is potential for a franchise system there that doesn’t currently exist, this might be your best opportunity for developing an international business operation.

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5 Responses to “Franchise Agreement”

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