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As a Franchisee Do I Own the Business?

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As a Franchisee Do I Own the Business?

As a Franchisee Do I Own the Business?

We recently received a very interesting question from a potential franchisee: “As a franchisee do I own the business and what happens when the Franchise Agreement ends?”

In a Nutshell

When you purchase a business, the franchisee owns the business entity and the assets of the business for example the accounts, the equipment, etc. The Franchisee does not own the Intellectual Property i.e., the brand and the know-how. The Intellectual Property is owned by the Franchised and is licensed to a Franchisee for the period of the agreement.

In effect, you are a CONDITIONAL business owner.

How Does the Franchise Agreement Work?How does a franchise agreement work

  • The Franchisor owns the brand, intellectual property, tradenames, trademarks, business model.
  • The Franchisee gives the Franchisee the right to own and operate the business in a pre-determined area, for a specific period.
  • The Franchisee needs to operate the business correctly as set out in the Operations and Procedure Manual and Franchise Agreement.

Franchising is a Long-term relationship, Not a Short-term Agreement

  • A potential Franchisee should have a long-term relationship in mind with the Franchisor when signing a Franchise Agreement i.e., extending the initial agreement period.
  • A Franchisee needs to comply with the rules and standards of the Franchisor for the duration of the agreement.
  • In some of the more established franchises, the franchisees have been part of the brand for more than 20 years.

What Happens When the Franchise Agreement Ends?

  1. Renew your Franchise Agreement

  • Renew your franchiseMost franchise agreements are signed for five years.  The Franchisee will have the option to renew their Franchise Agreement if all the conditions and operating standards have been adhered to.
  • In most instances, the agreement is extended by mutual consent from both parties.  The franchisor cannot unreasonably cancel the agreement if the Franchisee has operated the business in line with the brand requirements.
  • If the Franchise agreement ends the Franchisee will not be able to continue with the business, not even under another name.  All Franchisees will be limited/restricted by a restraint of trade clause in the agreement.
  • Most agreements are for 5 years with 5 yearly renewal extensions.
  1. Sell your FranchiseSell your franchise

  • A franchisee can sell their franchise during the initial period as well as once the agreement period comes to an end.
  • The Franchise Agreement will include clauses detailing exactly how a franchisee can go about selling their business.
  • The Franchisor always has the right to approve the new Franchisee.  The new franchisee will be required to sign a new Franchise Agreement.

In Conclusion

The Franchisee receives various benefits for buying into a successful and proven concept and brand, in a defined area/location.  However, it does come with limitations and consequences.  The Franchisee will never own the brand or Intellectual Property and will have to operate to strict regulations.  You will in effect, be a conditional owner.

Franchisees understand the benefits of joining a franchise as the risks are lower and the rewards higher when compared to owning an independent business.




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