How the franchising contract works

This type of commercial agreement is based on a collaboration between two parties: the franchisor, owner of the brand and holder of the know-how, and the franchisee (or affiliate), the entrepreneur who decides to invest in the brand by adopting models of business, strategies and distinctive identity.This collaboration agreement represents an increasingly widespread and appreciated business model globally and constitutes one of the most efficient ways of developing and expanding brands and companies in various commercial sectors. According to a recent study by Business Research Insights, the sector is expected to exceed the value of 175 billion dollars within the next three years: this business model is in fact becoming increasingly popular among entrepreneurs, because it allows you to own and manage a company that has already been established.

The advantages of the franchising contract lie in its ability to provide franchisees with the right to use an established brand and business model, while also granting exclusive access to a package of training, ongoing support and, sometimes, exclusive financing and supply agreements. This allows franchisees to open a new business by reducing the risks typically associated with starting a business from scratch, while benefiting from the franchisor's already established image and reputation.In this article, we will explore in detail what the franchising contract is, analyzing its main characteristics and the most important clauses that regulate the relationship between the parties. From the definition of the obligations and rights of both parties to the management of royalties, from the support provided during the start-up of the business to post-opening assistance. The objective is to provide an overview to potential entrepreneurs on the dynamics of the franchising commercial affiliation contract, which represents a growth opportunity not only for those seeking to expand their brand, but also for those who wish to undertake an entrepreneurial path making use of the support of an already consolidated reality.

The main characteristics of the franchising contract

The franchising contract regulates the legal relationship between the franchisee and the franchisor, defining the role of both, the obligations required for its fulfillment, the rights and methods of carrying out the activity.

This agreement is made up of some clauses intended to regulate, for example, the duration, the expected royalties and any entry fee, the exclusive use of the brand's brands, products and services, the support and assistance provided by the franchisor.

Although there are international guidelines that aim to standardize some fundamental aspects of the franchising contract, the applicable legislation varies significantly from one country to another, reflecting the legal, economic and cultural peculiarities of each legal system. Let us examine the main elements of the franchising contract together:

Duration, renewal and withdrawal

The duration of this agreement can vary significantly depending on the brand and industry in which it operates, often ranging from 5 to 10 years, with the possibility of renewal. Indeed, it is essential for the contract to clearly specify the renewal conditions, such as the required notice period and any applicable fees, as well as the termination procedures, which allow both parties to terminate the agreement fairly and transparently if expectations are not met or market conditions change. Entry fees e royaltiesThe entry fees constitute the fee requested from the franchisee at the beginning of the commercial relationship: they generally cover the rights to use the brand, the transfer of know-how by the franchisor and the use of the brand's distinctive signs. Royalties, on the other hand, are periodic payments paid by affiliates, which can be calculated as a fixed amount or as a percentage of the turnover generated by the activity. These contributions finance the ongoing services provided by the franchisor, such as technical support, marketing campaigns, training courses and access to partnerships established with banks and suppliers.

Franchise package

The franchise package includes all the elements provided by the franchisor to ensure the start-up and effective management of the business. This includes the use of the company's distinctive signs, operational know-how, technical and commercial assistance, as well as training programs for the entrepreneur and his staff. These elements are essential to maintain brand consistency and operational efficiency across all regional locations, while ensuring that each partner has the knowledge and resources needed to develop their business.

Purchase prices

Often, especially in agreements concerning the distribution of goods, it is envisaged that the affiliate does not pay royalties, but proceeds to purchase a minimum quantity of goods at a certain price. It is important that the contract clearly establishes how the prices of these goods will be determined, ensuring fair and advantageous conditions for the franchisee, without compromising the quality or accessibility of the products or services offered to end customers.

Exclusivity and non-competition agreement

Territorial exclusivity ensures the franchisee the right to operate in a specific geographical area without direct competition from other franchisees of the same brand. The non-competition agreement, on the other hand, imposes restrictions during and after the termination of the franchise agreement, prohibiting the franchisee from starting a similar business or working for a competitor for a certain period of time. These elements aim to protect the investments of both the affiliate and the franchisor, ensuring a mutually beneficial collaboration for both parties.