What is the meaning / definition of Franchise Agreement in the hospitality industry?

The Franchise Agreement is the legal contract that binds a franchisor and franchisee in business.

The Franchise Agreement is a contract that generally consists of terms and clauses that specify as to how a business (franchisor) agrees to provide another party (franchisee) with the company’s brand, services, operation methods and any other support to operate a similar business in exchange for a initial payment as well as a percentage of the generated income in form of a monthly re-occurring fee (royalty fee).

A Franchise Agreement is normally negotiable, and can range in durations of a year to even undetermined amount of years. Most common example of a franchisor is McDonalds, as the world’s largest franchise network. In the hotel industry franchises are very common as they allow independent hotels to benefit from the marketing power of greater brands or companies. Thereby allowing them a greater reach far beyond anything their own resources could buy. Additionally to this the franchisee benefits from advice, SOPs, simple business financing, support and security and overall less likely to fail. On the other hand, being a franchisor means loosing control over many aspects of your own company.

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