Understanding franchise agreements: Practical tips and legal insights

At Lawyerlink, we help both franchisors and franchisees navigate the legal side of franchising. Drawing on this experience, we have created this guide with the most common and important aspects of franchise agreements in mind.

Whether you’re a brand owner looking to expand efficiently, or an entrepreneur seeking a proven investment opportunity, understanding the franchise agreement is your first step. It defines each party’s rights and responsibilities, outlines branding and intellectual property (IP) use, and sets out key financial obligations. For small and medium-sized enterprises (SMEs) in the UK, getting these details right can be the difference between long-term success and costly disputes.

1. What is a franchise agreement?

A franchise agreement is a legally binding contract that governs the relationship between a franchisor (the brand owner) and a franchisee (the individual or company granted rights to operate under that brand). Under this arrangement, the franchisee typically pays initial and ongoing fees for the right to market and sell products or services under the franchisor’s established brand and operational framework.

Franchise agreements can be either exclusive or non-exclusive:

• Exclusive franchise agreement

Grants the franchisee exclusive rights to operate within a specified territory or market segment. This means no other franchisees, not even the franchisor in some instances, can enter that market.

• Non-exclusive franchise agreement

Allows multiple franchisees within the same region or market. While this might initially sound less attractive to franchisees, it can still be advantageous in certain situations, especially if the franchisor has a strong brand presence and there is room for multiple operators to serve local demand. For franchisors, non-exclusive arrangements enable quicker scaling and broader market coverage.

Regardless of exclusivity, every robust franchise agreement should clearly outline fee structures, territories, branding guidelines, dispute resolution methods, and termination clauses. Not understanding these details can lead to costly conflicts and operational headaches.

2. Why a non-exclusive franchise agreement?

• Flexibility and Growth

Non-exclusive arrangements may appeal to franchisors looking to expand quickly without tying themselves to a single regional operator. Franchisees, too, can benefit if a brand has a proven track record and ample consumer demand. Even if multiple franchisees operate in nearby areas, there can still be enough customer volume to sustain each outlet.

• Lower barrier to entry

A non-exclusive agreement may include lower franchise fees or more flexible terms, as the franchisor can spread risk among multiple franchisees. This can be particularly useful for SMEs with limited initial capital but a strong desire to join a reputable franchise system.

• Reduced territorial disputes

Exclusive agreements can lead to tensions when territories overlap, or online sales channel boundaries blur. On the other hand, a non-exclusive agreement openly acknowledges the possibility of multiple franchisees in a given market, potentially reducing territorial conflicts. This makes it even more critical to define the franchisee’s rights and responsibilities clearly.

3. Key components of a franchise agreement

A well-drafted franchise agreement generally includes several core sections, whether exclusive or non-exclusive. Understanding each can help UK SMEs anticipate potential challenges and protect their interests.

• Grant of rights and territory

This section defines the rights the franchisor grants to the franchisee, such as the use of branding, trademarks, and business systems. It specifies the territory where the franchisee operates. This territory may be shared with other franchisees in a non-exclusive agreement, though specific boundaries are often outlined to prevent direct overlapping. It is also crucial to comply with UK competition law by clearly defining fair territorial rights and avoiding anti-competitive provisions.

• Term and renewal

Franchise agreements typically span five to ten years, giving the franchisee sufficient time to recoup their initial investment. Renewal terms should be clearly explained, including any associated fees and the performance requirements that must be met for the agreement to be extended.

• Franchise fees

The financial elements of a franchise agreement usually involve an initial lump sum that covers training, onboarding, and the right to operate under the brand. Ongoing royalties are often calculated as a percentage of turnover or revenue, and other recurring fees may include marketing or technology costs. For SMEs, it is imperative to understand all potential fees, hidden or otherwise, to plan budgets accurately.

• Development plans and sales targets

Franchise agreements frequently set performance expectations, such as sales targets or other key metrics (e.g., opening additional units in multi-unit deals). Non-compliance with these targets can result in reduced territorial rights or, in extreme cases, termination. Both franchisor and franchisee should negotiate realistic targets based on market research and operational capacity.

• Intellectual property and branding

IP usage guidelines clarify how trademarks, logos, and domain names must be used and protected. Franchisors should have their IP rights registered correctly in the UK (and internationally, if applicable), and franchisees must follow branding standards to deliver a consistent customer experience. This consistency is key to maintaining the brand’s integrity across all locations.

• Franchisor and franchisee obligations

The franchisor is typically responsible for training, marketing support, and ongoing operational assistance. On the other hand, the franchisee must uphold brand standards, deliver quality products or services, and meet sales targets. Most agreements also reference an operational manual, which details day-to-day procedures. Regularly updated manuals help franchisees stay aligned with evolving brand guidelines.

• Non-competition and restrictive clauses

Such clauses prevent a franchisee from operating or investing in competing businesses during the franchise term and, in some cases, for a defined period after termination. In the UK, these restrictions must be reasonable and proportional to be enforceable.

• Key personnel and management requirements

Franchise agreements may stipulate specific management structures or roles. In some cases, the franchisor requires a full-time manager with particular qualifications. Additionally, SME franchisees should prepare for potential changes in personnel by implementing succession plans to maintain operational continuity.

• Termination and exit strategies

This part of the agreement covers events that can trigger early termination, such as failure to pay royalties, falling short of performance requirements, or breaching brand standards, and the procedures for selling or transferring the franchise. Clear guidelines on exit strategies help protect the franchisee’s investment and prevent costly disputes if circumstances change or the franchisee decides to exit.

4. Key checks before signing a franchise agreement

Before committing to a franchise, taking the time to properly assess the opportunity can save you from costly surprises later. Here’s what every SME should review carefully:

Financial clarity

• What are the upfront and ongoing fees?
• Are there any extra charges for marketing, technology, or system upgrades?
• How are royalties calculated, and can they change based on turnover?
• Look out for hidden costs. Insist on a full breakdown of all potential expenses before you sign.

Territorial rights

• Is your territory exclusive, shared, or non-exclusive?
• How are conflicts between nearby franchisees managed?
• If the agreement is vague about boundaries, clarify it early.

Support and training

• What training will you receive initially and during the franchise term?
• Are there extra fees for ongoing support or marketing materials?
• Will the franchisor help with local marketing campaigns?
• Strong support is key to long-term success. Make sure promises are detailed, not vague.

Performance expectations

• Are there sales targets or development milestones you must meet?
• What happens if you don’t hit those targets?
• Is there flexibility if market conditions change?
• Ensure performance expectations are realistic and achievable in your area.

Exit strategy

• How easy is it to sell or transfer your franchise rights?
• Are there penalties for early exit?
• Does the franchisor have the first right of refusal to buy your business?
• Having a clear, fair exit plan protects your investment if circumstances change.

Legal protection

• Does the agreement include a fair dispute resolution process, like mediation or arbitration?
• Which country’s law governs the agreement?
• Non-compete clauses should be reasonable in scope and duration to remain enforceable.

Operational clarity

Check that there is a detailed, up-to-date operations manual covering daily processes, customer service, staffing, and supply chain management. Without clear guidance, maintaining brand standards becomes difficult, and disputes become more likely.

5. Best practices for franchisors and franchisees

Once the agreement is in place, long-term success depends on how franchisors and franchisees work together. Whether you’re expanding your brand or building your own business, these principles will set you up for growth:

• Lay strong foundations

Franchisors should provide thorough onboarding, regular training, and practical operational support. Franchisees should do careful research before committing, looking into the franchisor’s reputation, market demand, and talking to existing franchisees.

• Protect and maintain the brand

Brand consistency is crucial. Franchisors must safeguard trademarks and ensure franchisees use approved branding. Franchisees should stick closely to brand standards in every aspect of their operation, from marketing to customer experience.

• Set realistic goals

Franchisors should set clear but achievable sales and development targets. Franchisees must plan their finances carefully and work towards building sustainable profitability, rather than focusing only on short-term gains.

• Communicate openly

Open communication keeps the relationship strong. Franchisors should regularly update franchisees on new developments, system changes, and market insights. Franchisees should provide honest feedback, raise challenges early, and work collaboratively towards solutions.

• Stay adaptable

Markets change. Franchisors may introduce new products, tweak operations, or adjust business models. Franchisees who stay flexible and adapt quickly will be best positioned to thrive.

• Ensure legal and regulatory compliance

Franchisors must ensure agreements, territory rules, and operational standards comply with UK laws. Franchisees should seek legal advice before signing, and remain informed about their ongoing obligations under the agreement.

6. Setting yourself up for success

Whether you are a franchisor expanding your brand or a franchisee building your own business, entering into a franchise agreement is a major step that deserves careful planning and thorough due diligence. The key to a successful franchise relationship is clarity: clearly defined rights and obligations, transparent fee structures, strong operational guidance, and a fair exit strategy.

By asking the right questions, avoiding common pitfalls, and seeking professional advice early on, you can build a strong foundation for long-term success.

It’s also worth making use of professional associations like the British Franchise Association (BFA). They offer trusted resources, guidance, and networking opportunities for both franchisors and franchisees. Membership can help you stay up to date with best practices and navigate the franchising landscape more confidently.