What is a franchise agreement?

Starting a business is a rewarding, exciting, motivating entrepreneurial adventure, but it is also risky and full of surprises. When creating a business, everything needs to be built: the business plan, the graphic charter, the brand image, the community, the clientele… And this can sometimes be very complicated. Franchising helps alleviate certain aspects of starting a business. Indeed, the franchisee can rely on the solid foundations of the franchise network. To do this, the franchisor and the franchisee will sign a contract. But then, what is a franchise contract?

Definition of the Franchise Contract

General Definition of the Franchise Contract

The franchise contract engages two companies: the franchisor and the franchisee for a duration ranging from 3 to 9 years. The franchise contract is an agreement between these two parties: The franchisor grants the franchisee the right to operate its brand, its trademark, its know-how, and to market its products or services, while benefiting from commercial or technical assistance in exchange for compensation. 

You have probably understood that creating a franchise contract represents an advantage on both sides as it allows the franchisor's brand to expand a concept that works and enables the franchisee to benefit from it by starting their own business. Considering the definition in community law, the franchise contract is essentially defined by three components:

• The transfer of know-how from the franchisor

• Assistance: Each franchisor defines how they plan to support their franchisees. 

• Brand rights: (a set of signs that allow customers to identify the franchisee as belonging to the network, e.g. the trade name, the graphic charter, etc.). Trademark rights and copyright help the franchisor ensure the protection of all these elements specific to their network.

We will revisit these three points a little later in our article! 

Legal Definition

There is not quite a legal definition of the franchise contract; indeed, it is not defined by the civil code nor by the commercial code. However, it is governed by two codes:

• The rules regarding the Pre-Contractual Information Document (DIP): Since the vote of the Doubin in 1989, every franchisor is required to provide a DIP to the franchisee about to commit at least 20 days before signing the franchise contract. The purpose of this document is to gather all the information that the franchisee needs to sign the contract with full knowledge of the facts. 

• The Code of Ethics, a document that lists the good practices and behaviors to adopt for users of the franchise in Europe. 

What are the different existing forms of the franchise contract?

There are 5 types of franchise contracts. The distinction between these different forms of contract results particularly from the nature of the know-how transmitted:

• Distribution Franchise: In this type of contract, the franchisor sells the products in a store bearing the franchisor's name. The franchisor ensures the transmission of know-how through various marketing techniques and provides assistance. 

• Service Franchise: In this type of contract, the franchisee offers a service under the name or even the brand of the franchisor. It therefore naturally differs from the first contract we saw previously since it does not involve the sale of products or the manufacturing of goods. 

• Industrial Franchise: This type of contract defines that the franchisee manufactures the products they will sell under the franchisor’s brand. In this case, the know-how transmitted is based on the manufacturing method of these products (for example: recipes if it concerns food products).

• Counter Franchise: This type of contract particularly concerns the mode of operation of the franchised system. The counter franchise is defined by a designated space created by a traditional merchant within their store for operating the franchised concept, or in a kiosk set up within a large structure. We can take the example of perfume, candy, or tobacco kiosks found in airports.

• Financial Franchise: The franchise contract is a type of contract that is not related to the transferred know-how but concerns the financial aspect. Indeed, certain sectors, including hospitality and catering, require investments. In this case, the financial franchise allows conferring the financing of the operation to investors, and the management of the establishment to a competent person, but not having sufficient funds.

What must a franchise contract contain?

The mandatory information that must appear in a franchise contract

Who can buy a franchise?

The franchise model can work in all sectors: from catering to hospitality. It is possible to buy national franchises as well as international ones.

How is the know-how transmitted to the franchisee?

We have seen that the franchise contract is based on a transmission relationship of know-how. In this case, how is it transmitted? Well, it is transmitted with a know-how manual: It is a collection of documents gathering all the elements that contributed to the success of a project.  

What costs are associated with creating a franchise?

Creating a franchise represents a certain cost ranging from 5,000 to over 20,000 €. This sum paid by the franchisor to the franchisee is known as an entry fee. It is necessary to ensure the support, training (the know-how) that they need. 

Obligations Related to the Franchisee

• The franchisee must source exclusively or almost exclusively goods and services from their franchisor and/or from suppliers approved by them and must respect the standards set by them as well as the operating conditions of the brand.

• Non-competition Obligation: This clause prohibits the former franchisee from engaging in a similar activity to that of the franchise network for a period of one year.

• Post-contractual Non-affiliation Clause: This clause is somewhat similar to the previous one since it only prevents the former franchisee from joining or creating a competitive chain to their former franchisor during a period.

• Renewal and Termination Conditions: The franchisor must respect a notice period of several weeks or even several months to inform the franchisee of their decision not to renew the franchise contract.

Obligations Related to the Franchisor

The franchisor must comply with certain conditions when drafting the franchise contract:

• They must transmit commercial and technical know-how, as well as advertising support to the franchisee.

• They must fulfill a duty of assistance (promotional actions and/or advertising, managing their