3 Types of Restaurant Franchise Agreements

Franchise outlets operate under the brand name–owned by the franchisor. A restaurant franchise should be governed by a franchise agreement, a legal and enforceable contract defining the franchisor-franchisee relationship. Franchisors draft franchise agreements and they typically contain the applicable terms & conditions of the franchise.

A good franchise agreement should be balanced, fair, and with provisions, such as a dispute resolution mechanism and applicable laws, to protect both parties when disputes or challenges arise. Unfortunately, most franchise agreements are drafted in favor of the franchisor, and that’s why it’s important to involve a lawyer when drafting a franchise agreement for a food outlet.

Types of Franchise Agreements for Restaurants

A food outlet or restaurant can expand in the following ways:

1. Master franchising

In master franchising contracts, a prospective buyer or franchisee acquires the right to operate a business under the name of the franchisor’s brand in a designated market or territory. The prospective franchisee is called a master franchisee, and they assume the franchisor’s role in the new territory, including:

• Trading the products and services of the franchisor;
• Selling franchises;
• Hiring and firing human capital;

2. Single-Unit (Direct) Franchising 

In a single-unit franchise, the franchisee acquires the right to operate in a specified or one location, using the franchisor’s intellectual property, such as brand name, service marks, and operating system. This type of franchising is the most popular or standard, and its features include:

• A direct relationship between the franchisor and franchisee;
• There are no third parties or intermediaries;
• The franchisee is the primary operator/manager of the outlet.

3. Multi-Unit Franchising

In multi-unit franchising, a franchisee has the right to operate many outlets within a specified territory. The franchisee assumes the role of a franchisor in all designated territories. A multi-unit franchise can be lucrative if used well.

Legal Provisions for Restaurant Franchising Agreement

The Franchising law requires franchisors to furnish prospective franchisees/buyers with a disclosure document before entering financial commitments. Also, prospective buyers are expected to conduct due diligence before buying a franchise. A valid franchise agreement for a food outlet should have the following features: 

1. Should specify duties, roles, and obligations of each party;
2. Dispute resolution mechanism;
3. Guidelines on the termination of the franchise;
4. Legal capacity of the transacting parties to sign a contract;
5. Protection of intellectual property;
6. Competition and unfair trade practices;

When drafting a fair and just franchise agreement for a food outlet, many rules and laws can come into play. Both parties, particularly the franchisee, should involve a legal professional specializing in franchising when signing a franchise agreement.