Types of Franchise Agreements

By Franchise InformationJuly 22, 2021

Owning a franchise can bring all the benefits of owning your own business without the typical risks included—and there’s all sorts of potential for a franchisee to see large profit, and at many different levels. You likely know someone who has seen benefits from a franchise. But are you aware of the different types of franchise agreement that exist for different types of franchising?

Types of Franchise Agreements

Anywhere from owning a single business unit to running a region of multiple franchises and hiring additional franchisees—different franchise agreements grant the franchisee different allowances. Determining those allowances will involve choosing a type of franchise agreement and agreeing on the terms of franchise agreement.

Depending on what kind and size of business investment you’re considering, a basic understanding of the primary types of franchise agreements, and what’s included with each, can help you decide what might work best for you.

How does a franchise agreement work?

What is a franchise agreement, and who does what? A franchise agreement is a legal contract between two parties, or, in legal terms, two companies: a franchisee and a franchisor. A franchisee is an individual or company who is granted permission by a franchisor to distribute or sell the franchisor’s product or service using the franchisor’s brand. Three things are required for a franchise agreement:

  • A fee—the franchisee must pay the franchisor in some form.
  • A brand—this is the franchisee’s rights to use the intellectual rights of the franchisor.
  • Marketing—the way franchisors help promote or market the brand.

These are vague descriptions. But a terms of franchise agreement will help the franchisee and franchisor decide on specific terms.

Terms of Franchise Agreement

In a franchise agreement, the franchisor lays out terms and requirements the franchisee must adhere to in order to operate under the franchisor’s brand name, and all it entails. Some key elements that will be covered in the terms of franchise agreement will include: length of agreement, royalties or fees to be paid to the franchisor, equipment provided to the unit(s), and other stipulations that can be agreed on between the two parties.

What are the types of types of franchise agreement?

In a franchise agreement, the franchisor lays out terms and requirements the franchisee must adhere to in order to operate under the franchisor’s brand name, and all it entails. Some key elements that will be covered in the terms of franchise agreement will include: length of agreement, royalties or fees to be paid to the franchisor, equipment provided to the unit(s), and other stipulations that can be agreed on between the two parties.

What are the types of types of franchise agreement?

Terms of a franchise agreement will typically fall into a standard type of franchise agreement. The three main types are:

  • Individual franchise agreement
  • Area franchise agreement
  • Master franchise agreement

Individual Franchise Agreement

The most common of all franchise agreements, an individual franchise agreement—or single unit agreement—gives the franchisee legal permission to operate a single business unit from the franchisor. This is a great starting point for anyone who has never owned a franchise before. In general, franchises lower the risk involved with running your own business: with an individual franchise agreement, your risk is at its very minimum.

The good news is that, if the initial single unit goes well, many individual franchise agreements are renegotiated to allow for additional business units. Additional businesses are still under their own individual franchise agreement, but the owner can have multiples. This differs from an area franchise agreement.

Area Franchise Agreement

Many franchise owners now will operate several units. An area franchise agreement is signed with the understanding that the franchisee will be responsible for multiple units. And, typically,  they’ll be responsible for a geographical area, hence the name.

For first time franchisees, individual franchise agreements are a great way to start; but for area franchise agreements, the franchisor typically expects this owner to possess a certain amount of business savvy and an understanding how to run multiple business units simultaneously, often by managing several other franchisees.

The added benefit to area franchise agreements is that the franchisee can absorb and manage the overall cost over multiple business units. If one business unit struggles to find success (temporarily), the franchisee can manage that across the entire area of, hopefully, more successful units.

Master Franchise Agreement

If thinking about the different types of franchise agreements in a hierarchy, master franchise agreement grants the most responsibility to an individual franchisee. In this agreement, the franchisee is granted permission by the master franchisor the ability to hire other franchisees to run business units under the franchisor’s brand. In this agreement, the master franchisee is responsible for the training, hiring, and success of those other franchisees.

Want to learn more about the different types of franchises available, and which might be the best for your business investment? Franchise.com provides unique tools and resources to show you franchise options, what a successful franchise plan looks like, and where you can get started. Visit today!

About the Author - Franchise Information

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