Franchise agreement: buying a system, not a business

A franchise agreement is a licence to trade under someone else’s brand, using their system, in return for fees and a considerable amount of control over how you run your own business. What is being sold is not a business — it is a method plus a name plus, in the better cases, ongoing support. Franchisees who are disappointed almost always misread that sentence at signature: they bought what they thought was a proven business and received a licence with obligations attached.

What a franchise agreement contains

• The licence itself: the marks you may use, for what, and in which territory — and whether that territory is exclusive, which is frequently assumed and rarely granted outright.
• Fees: the initial fee, the ongoing royalty as a percentage of revenue rather than profit, and the marketing levy. The royalty on revenue is the clause that decides whether a low-margin site can ever work.
• The system you must follow: suppliers, pricing, opening hours, fit-out, branding — set out in the operations manual, which is usually incorporated by reference and can be changed unilaterally.
• Term and renewal, including whether renewal is a right or a discretion, and what a refit obligation at renewal will cost.
• Transfer: whether you can sell the franchise, to whom, and what the franchisor takes from the proceeds.
• Post-termination restrictions: what you may not do, where, and for how long after it ends.

What to read before signing

1. The operations manual, not just the agreement — that is where the actual obligations live, and it is the document least often read before signature.
2. The supply arrangements: whether you must buy from the franchisor or nominated suppliers, and at what margin to them.
3. The financial projections, and specifically whether they are the franchisor’s own figures or an average across franchisees including the best sites.
4. The termination clauses from both directions — what lets them terminate, and what you are left holding if they do.
5. Talk to current and, more usefully, former franchisees. The franchisor will offer a list; ask for the ones who left.
6. In jurisdictions with pre-sale disclosure rules, the disclosure document is a legal entitlement rather than a courtesy — read it and note what it omits.

Ongoing royalties are charged on turnover, not on what you keep. A seven per cent royalty plus a two per cent marketing levy on a business with ten per cent net margin takes most of the profit, and the arithmetic does not improve with volume. Model this before anything else; it is the single calculation that determines whether the franchise can work at your expected revenue.

What the franchisor is buying from you

• Consistency, which is why the control is extensive and why deviation is a breach rather than a preference.
• Local capital and local effort, in exchange for a system they do not have to fund site by site.
• A recurring revenue stream that is largely insulated from your profitability.
• Brand protection, which is the reason for the post-termination restrictions and the supplier requirements.
• None of this makes franchising a bad arrangement — it makes the interests only partly aligned, which is worth knowing before rather than after.

Not every arrangement starts as a binding contract. A memorandum of understanding records what two parties intend before terms are final, which is common while territory, fees and support are still being negotiated.

Where the documents live

Ettex Docs keeps the agreement, the operations manual and every subsequent variation together with version history, which matters because the manual changes during the term and the version in force on a given date is exactly what a dispute turns on. Franchisees should keep their own dated copy rather than relying on a portal the franchisor controls. The operating detail, once you are running, is a standard operating procedure exercise like any other. Ettex does not draft or review franchise agreements and this is not legal advice — franchising carries jurisdiction-specific disclosure and termination rules, and a specialist franchise lawyer before signature costs a fraction of one afterwards.