Franchising 101: What Is a Franchise Agreement

If you have been wanting to become your own business owner, but don’t have all of the pieces in place to build out an idea from the ground up, you most likely have looked into starting a franchise. Franchise operations are an important component of the modern American economy. By offering alternative avenues towards small business ownership, franchises stimulate growth and create opportunity.

While there are many benefits to starting a franchise, there are some hurdles that you will have to get over if you see yourself as a franchisee in the future. If you’ve done some research on the topic, one thing you have probably run into is something known as a Franchise Agreement. If you have asked yourself, “What is a franchise agreement?”, you aren’t alone.

Everyone that opens a franchise business must also grapple with the complex document that is known as a Franchise Agreement. In this article, we’re going to provide a comprehensive overview of a Franchise Agreement. We’ll explore what Franchise Agreements are, what the elements of a Franchise Agreement include, and discuss whether the terms and conditions inherent in a Franchise Agreement are negotiable. This information should be helpful for those who are interested in opening a cycling franchise but aren’t sure what it entails.

What is a Franchise Agreement?

Contracts are the lynchpin of modern business, and franchises are no different. Before we dive into the nuts and bolts of the Franchise Agreement, let’s set the stage to consider what a franchise really is. At a basic level, franchises are a way to duplicate a business, including its brand, products, services, marketing techniques, and many other components that make it profitable.

Franchises are complex business arrangements, and just like any other complicated business venture, you would want a contract drawn up that outlines what you get from the arrangement, and what you have to give. This, at a basic level, is the role of the Franchise Agreement. Franchise Agreements are legally binding contracts that are made between the two parties in the relationship; the company, which is referred to as the franchisor, and you, the franchisee.

What is the Difference Between a Franchise Agreement and a License?

One common area of confusion that pops up in discussions about Franchise Agreements is whether a licensing agreement or a franchise are the same thing. To start, licensing and franchising are two separate things. These are actually very different legal structures, so it is worth taking a moment to understand what exactly sets a franchise apart from a license.

In a licensing operation, the licensee is given the right to use another brand’s intellectual property, such as their products and branding, but is not bound to follow their business model. A common example of this is the Starbucks coffee shops that you find in grocery stores and airports, which contain the same branding and products but are operated independently of the core Starbucks corporate-owned stores.

In contrast to a licensing arrangement, a Franchise Agreement requires that the franchisee operates using the same brand, products, and business model. The easiest way to think of this is as if another branch of the same business were opened. In a franchise operation, the franchisee must operate the business the same as the franchisor.

There are benefits and drawbacks to both types of relationships. The strength of a franchise relationship is that the franchisees gain access to the market research, operational model, training, and marketing resources of the franchisor. The drawback is that there is less flexibility in how they deploy those resources, as there is an expectation of consistency across locations. In contrast, a licensee has greater flexibility in how they operate their business on a day-to-day level but doesn’t have access to the resources that the licensor has.

What are the Elements of a Franchise Agreement?

Franchise Agreements are inherently complex, as they outline the foundation for the relationship between the franchisor and franchisee moving forward. At a basic level, Franchise Agreements clearly set out the duties and responsibilities of both the franchisor and franchisee, but this explanation does little to shed light on the actual elements of a Franchise Agreement.

Here, we’ll break down the core elements of a Franchise Agreement. It should be noted that Franchise Agreements vary depending on the franchise. Put another way, some Franchise Agreements will have all of these elements, while others may not. Due to the fact that purchasing a franchise is an important business decision, it is important to exercise a high level of due diligence during the selection and contract process.

Operational Territory

You need to know where you are allowed to open your franchise, and the franchisor needs to ensure that their franchisees remain competitive no matter where they are. As such, an important component of nearly every Franchise Agreement is a clear description of where exactly you can operate your franchised business. Depending on your Franchise Agreement you may have exclusive rights to operate in your specific area, which can be beneficial by reducing direct competition.

Business Operations

Unlike licensing arrangements, franchises are expected to conduct day-to-day business in line with the franchisor’s guidelines and requirements. Your Franchise Agreement should have clearly outlined expectations for how operational and business decisions are expected to be handled. Typically, ensuring that this takes place according to the franchisor’s wishes comes down to extensive training, which allows your business to become a direct extension of the franchisor’s business.

Training

One of the biggest advantages that franchise opportunities offer is that they give the franchisee access to the training and support of the franchisor. This training allows the new franchise to operate as a new branch of an existing brand while maintaining the continuity that made it successful in the first place. Training should be thought of in terms of a resource that you gain access to rather than having to invest in it yourself.

Ongoing training is particularly important in franchise relationships. Any ongoing training obligations on the part of the franchisor should be clearly outlined in this section, so pay close attention. As the relationship between franchisor and franchisee is generally a fairly long one, having access to ongoing training and support resources can be a deciding factor in the success or failure of your venture.

Contract Duration

The duration of the contract between franchisor and franchisee should be clearly outlined in the Franchise Agreement. Whereas many licensing agreements result in long contract terms, franchises often start at much shorter periods of time, sometimes as little as five years. Having a clear understanding of the length of time you are contractually bound as the franchisee is essential to making an informed business decision.

Initial and Ongoing Fees

With a Franchise Agreement, you are contracting with a franchisor to gain access to their brand, intellectual property, business operational model, research, and much more. However, this access hinges on fees. While your success is ultimately the success of the brand, there is an expectation that the venture will be profitable for both participants.

Within the Franchise Agreement, any initial and ongoing fees that are part of the contract should be clearly outlined. The initial fee is sometimes referred to as a franchise fee, which gives the franchisee access to the franchisor’s resources, brand, an intellectual property. Ongoing fees usually take the form of a royalty fee, which may be a flat rate or may be a percentage of the monthly total sales.

Intellectual Property Usage

While you are the owner of a franchise you gain access to the intellectual property of the franchisor, including things like the franchisors logo, signs, patents, or trademarks. Any Franchising Agreement should have clearly outlined rules for how this information may or may not be used. You may be prohibited from using the brand or logo in certain ways, so pay close attention to this section so that you don’t inadvertently violate your contractual obligations.

Access to Marketing

One of the strengths of a franchise opportunity is that it gives you access to a scale of resources that are often beyond your reach. Gaining access to the marketing and advertising capabilities of the franchisor can help stimulate growth and ongoing prosperity. Most Franchise Agreements will provide clear expectations regarding the requirements for accessing the advertising and marketing efforts of the franchisor. In this section, you’ll see what type of advertising and marketing resources your franchisor will offer, and you’ll also see what your obligations are to gain access to those resources.

Renewal and Termination Clauses

Every Franchise Agreement will clearly outline how the relationship between the franchisor and franchisee can be renewed or terminated. If one party seeks to terminate the relationship before the end of the contract, the Franchise Agreement may include a requirement to enter arbitration or include some other mechanism to avoid any litigation. Clearly understanding the renewal and termination terms in the Franchise Agreement should be a high priority before entering into any contractual relationship.

Resale or Owner Transfer Options

Each franchisor will outline exactly how a franchise can be sold. Ultimately, franchisors want to maintain some degree of control over who operates their franchises, as the success of each franchise can reflect on the success of the other franchises. Some Franchise Agreements may include a clause that requires the franchisee to give the franchisor the first option to purchase their franchise.

Are Franchise Agreements Negotiable?

One question that usually comes regarding Franchise Agreements is whether or not they are negotiable. This is a reasonable question, given the fact that a Franchise Agreement is a business contract. Typically, business contracts are negotiable, yet you may find that most of the components of a Franchise Agreement aren’t negotiable with the franchisor.

One way to find out if the Franchise Agreement you are considering is negotiable is to ask in advance. This may give you some sense of if the agreement is negotiable, and to what degree it is negotiable. However, broadly speaking, most Franchise Agreements aren’t negotiable.

The rigidity of a Franchise Agreement is due to many factors, but there are a couple of reasons that are broadly true in most cases. The first is that franchisors tend to maintain the same contract with all of their franchises. This not only makes administration more streamlined but also eliminates anyone franchise owner feeling like they were taken advantage of.

The second reason that Franchise Agreements tend to be non-negotiable is that by keeping all of the contracts the same, it is easier to comply with any relevant legal requirements. There are also other reasons that a franchisor might want to not allow any changes to the contract. These include safeguarding the brand and intellectual property by maintaining uniformity across locations, and also ensuring that there is product consistency at different locations.

Why Choose Rush Cycle?

Given the fact that opening a franchise is an inherently complex endeavor, it is important to carefully consider the organization you will be partnering with. Rush Cycle’s franchise opportunities are unique. Our passion for fitness and our unique approach to wellness will ensure that members of the community leave each class feeling refreshed, revitalized, and continue to come back for more each week. If you are passionate about health, well-being, and fitness, partnering with Rush Cycle can allow you to fuse your passion with your entrepreneurship.

At Rush Cycle, we believe in partnering with select entrepreneurs for long-term growth and success. Our comprehensive training and knowledge base will ensure that you can hit the ground running with your new franchise, while at the same time allowing you to grow alongside our ever-expanding family of locations. With over 40 years of experience in promoting successful franchises, our team at Rush Cycle has the experience and knowledge-base to help you achieve sustainable, long-term growth that allows you to achieve your personal and financial goals.

Closing Thoughts

Franchises can be an exciting business opportunity for individuals that lack the capital or resources to start a business from the ground up. Franchises give you access to the knowledge, resources, brand, marketing, and advertising of the franchisor, but also require you to maintain the integrity of that brand and utilize the same business model. We guide you on the different steps to successfully start a gym franchise and will help you throughout the entire process.

Franchise Agreements are the contractual mechanism through which the relationship between the company, or franchisor, and the individual, or franchisee, is created. Not all Franchise Agreements are alike, but nearly all will include detailed information about where you can operate a franchise, how it is supposed to be operated, what your financial obligations to the franchisor are, how you may use their brand and intellectual property, and how you can terminate the relationship or sell your franchise.

Opening a franchise is a big decision, so be sure to take your time and exercise an appropriate level of due diligence. You’ll most likely want to work closely with an attorney experienced in setting up a franchise, particularly for reading and understanding the Franchise Agreement. Taking your time to fully understand each party’s duties and obligations, as outlined in the Franchise Agreement, is essential to ensure you have realistic expectations moving forward.

To learn more about franchise opportunities with Rush Cycle, please contact us today for an introductory consultation.