Franchise Agreement: What It Is and How the Franchise Works Between Business and Partner

In the modern business environment, the model of entrepreneurial activity that allows one company to scale and another to start its own business with minimal risks is becoming increasingly popular. 

We are talking about franchising (franchise agreement) — a system of partnership relations where a large brand grants a smaller business the right to use its trademark, technologies, and established business processes. As of 2026, franchising in Ukraine is regulated by the Civil Code, the Commercial Code, and specific provisions that define the legal framework for commercial concessions. Understanding what a franchise agreement is, its key conditions, and the rights and obligations of the parties is critically important for any entrepreneur planning to acquire a franchise or sell the right to use their business model. This article comprehensively reveals the essence of franchise relationships, analyzes the roles of the parties, the main terms of the agreement, and the types of this form of cooperation that has become a growth driver for many international and Ukrainian brands.

What is a Franchise Agreement and How Does It Work

A franchise agreement, also known in Ukrainian legislation as a commercial concession agreement, is a written contract under which one party — the franchisor — undertakes to provide the other party — the franchisee — for a fee, the right to use a complex of exclusive rights owned by the franchisor. This complex usually includes the right to the trademark, trade name, brand design, commercial information, know-how, business technologies, and other intellectual property objects. The mechanism of the franchise operates on the transfer of an already established and tested business model. The franchisor, who owns a successful business, creates a detailed package of documents that includes management guidelines, marketing strategies, service standards, recipes, or technology maps. The franchisee, in turn, purchases the right to use this model in a specified territory and for a predetermined period. In return, they pay an initial fee and regular royalties — deductions from turnover or a fixed amount. The franchise launch process looks like this: a potential partner selects a well-known brand, signs a contract, pays the initial fee, after which they gain access to all developments and support from the parent company. The franchisee opens their own business under the well-known name, which significantly reduces the time for promotion and increases the chances of success. The franchisor receives stable passive income and the ability to expand the geography of their brand without large capital investments in opening new outlets.

Parties to the Franchise Agreement and Their Roles

Two key parties participate in franchise relationships, each with its own unique role and functions. The first party is the franchisor, which is the company or individual that owns the brand, trademark, technologies, and entire business system. It is the franchisor who creates, develops, and improves the business model, which will then be replicated. They are responsible for the brand's reputation, protecting intellectual property, training partners, and ensuring compliance with uniform standards. Examples of major franchisors include McDonald's, Starbucks, KFC, while in Ukraine — 'Pravda', 'Lviv Croissants', 'Only Sausages'.

The second party is the franchisee, which is the entrepreneur or company that purchases the right to use the business model and opens their own outlet under the well-known brand. The franchisee invests their own or borrowed funds in renting premises, its arrangement, purchasing equipment, and hiring staff. They directly manage operational activities but do so according to the clear rules and standards set by the franchisor. It is important to understand that the franchisee is not an employee or branch of the parent company. They remain an independent economic entity, pay taxes, bear responsibility for their obligations, and dispose of the profits received after deducting royalties. However, the success of their business directly depends on compliance with the brand standards and the quality of products or services, as any mistake can negatively affect the reputation of the entire network.

Key Conditions of the Franchise Agreement

A commercial concession agreement is a complex multi-page document that must contain several mandatory conditions. First, there is the subject of the agreement — a clear definition of the complex of exclusive rights being transferred, including specific intellectual property objects. Second, the territory wherein the franchisee has the right to operate must be clearly defined. It can be exclusive, meaning no other partner will operate in that territory, or non-exclusive, meaning other franchisees are allowed. Third, a condition for remuneration is mandatory. The agreement must clearly define the amount of the initial fee, which is paid once upon joining the network, and the regular royalties, which can be calculated as a percentage of revenue, a fixed monthly amount, or a percentage markup.

The fourth important condition is the duration of the agreement. Typically, franchise agreements are concluded for a period of one to five years with the right of further extension. Fifth, the agreement must specify the procedure for monitoring compliance with quality standards and the conditions for inspections by the franchisor. The question of subsidiary liability of the franchisor for claims made against the franchisee is also regulated in the agreement. According to Article 1138 of the Civil Code of Ukraine, if the franchisor grants the right to use their brand to several partners, they bear subsidiary liability for damages caused to third parties due to the defects of goods produced by the franchisee. Additionally, the agreement may include provisions for staff training, marketing deductions, conditions for early termination, and dispute resolution procedures.

Rights and Obligations of the Franchisor and Franchisee

For the successful functioning of the franchise system, it is important to clearly understand the rights and obligations of each party. The main obligations of the franchisor include:

1. To provide the franchisee with a complete package of necessary technical and commercial documentation, including management guidelines, quality standards, and operational regulations.

2. To provide consulting support and assistance in selecting premises, its design, and opening the outlet.

3. To train the franchisee's staff to operate according to the brand standards, technological processes, and customer service rules.

4. To ensure constant monitoring of compliance with quality standards, without interfering in the franchisee's operational activities.

5. To timely inform about changes in technologies, assortment, design, and other business aspects.

6. To protect the brand's intellectual property from illegal use by third parties.

The main obligations of the franchisee, in turn, include:

1. To pay the initial fee and regularly pay royalties in amounts and timelines stipulated in the agreement.

2. To use the trademark and other intellectual property objects exclusively as defined by the agreement.

3. To adhere to quality standards, production technologies, and service rules.

4. To not disclose commercial information and know-how received from the franchisor.

5. To provide representatives of the franchisor with the opportunity to conduct inspections for compliance with the agreement's conditions.

6. To coordinate any changes in design, assortment, or marketing activities with the franchisor.

The rights of the parties correspond with the specified obligations: the franchisor is entitled to receive remuneration and monitor compliance with standards, while the franchisee is entitled to receive support, territory protection, and brand usage. Both parties also have the right to early termination of the agreement in the event of the other party's failure to fulfill its obligations.

Types of Franchising in Business

Franchising is not a homogeneous system; there are several main types of this cooperation model that are chosen depending on business goals and company sizes. Classic or product franchising assumes that the franchisee receives the right to sell goods produced by the franchisor. They use the franchisor's trademark, store design, and service standards. Typical examples include Adidas and Nike stores, mobile operators. The second type is manufacturing franchising, where the franchisor grants not only the brand right but also the production technology. The franchisee receives a license to manufacture goods under the well-known brand, purchasing raw materials and ingredients from centralized suppliers. This is how brewery or beverage manufacturing networks operate.

The third type is service franchising, which is the most common in the service sector. It involves transferring the technology of providing services, customer service standards, and corporate style. This category includes fast-food restaurant chains, dry cleaners, beauty salons, training centers, hotel chains, and real estate agencies. The fourth type is business format franchising, which is the most complex. In this model, not just the right to a brand or technology is transferred, but the entire business system, including marketing strategies, personnel management systems, reporting and control methods.

The franchisor provides constant support at all stages, and the franchisee must consistently adhere to all standards. Bright examples of business format franchising include McDonald's, Subway, KFC. Additionally, there is conversion franchising, where an already existing independent business joins the network, gaining the right to use the brand and standards, as well as sub-franchising, where a large partner gains the right to sell franchises in a specific territory, becoming a sort of intermediary franchisor. The choice of a specific type depends on the development strategy of both the rights holder and the future partner, as well as market specifics and industry characteristics.

Financial Terms: Initial Fee and Royalties

The financial component of the franchise agreement is one of the most important for both parties. It consists of two main elements: the initial fee and royalties. The initial fee is a one-time payment that the franchisee pays to the franchisor upon signing the agreement for the right to join the network and receive a starter package of services. The amount of the initial fee can vary significantly depending on the brand's popularity, the level of support the new partner receives, and the market situation. As of 2026, initial fees in Ukraine range from several thousand dollars for small local brands to tens of thousands for well-known international chains. What is usually included in the initial fee:

1. Granting the right to use the trademark, corporate style, and commercial information.

2. Development of a business plan and assistance in choosing premises.

3. Training the owner and key personnel to brand standards.

4. Marketing materials for launching the sales outlet.

5. Technological maps, recipes, or production instructions.

6. Consulting support during the opening phase.

It is important to understand that the initial fee is not the only startup expense. Additional costs include rent or purchase of premises, its renovation and arrangement, equipment purchase, furniture, and inventory costs. Therefore, the total budget for opening may be several times more than the amount of the initial fee. Royalties are regular periodic payments that the franchisee pays to the franchisor throughout the duration of the agreement for the right to use the brand and receive ongoing support. Royalties can be calculated in various ways. The most common method is a percentage of the franchisee's gross turnover (revenue), which can range from 3% to 10% or more, depending on the industry.

The second method is a fixed monthly fee that does not depend on turnover. This approach is convenient for businesses with high seasonality or for large chains. The third method is a percentage of the markup or margin profit, which encourages the franchisor to help the partner increase efficiency. In addition to royalties, the agreement may provide for another type of payment — marketing deductions. This is an additional fixed percentage of turnover directed to the network's general advertising fund. These funds are used for advertising campaigns, rebranding, website support, and other activities beneficial to all partners. The franchisor is obliged to report transparently on the use of these funds. Overall, the total size of regular payments from royalties and marketing deductions rarely exceeds 10-12% of turnover, making the business profitable with an adequate sales level.

Advantages and Risks of the Franchise Agreement

Entering into a franchise agreement has both significant advantages and certain risks that should be carefully weighed before making a decision. Advantages for the franchisee:

1. The ability to start a business under a recognizable brand guarantees a quick start and high sales volumes.

2. Access to a tested business model reduces the risk of bankruptcy in the early years.

3. Receiving constant consulting, marketing, and technological support from the franchisor.

4. Training for staff and the owner’s qualifications without additional costs.

5. The ability to purchase goods or raw materials at corporate prices from verified suppliers.

6. Using established service standards and marketing strategies.

Advantages for the franchisor:

1. Rapid scaling of the business without large capital investments in opening new outlets.

2. Receiving stable passive income in the form of royalties and initial fees.

3. Increasing brand recognition and strengthening market position.

4. Simplified quality control system through process standardization.

5. Motivated franchisees who are personally interested in the success of their business.

However, there are significant risks that should be considered. The main risks for the franchisee:

1. Strict limitations on the freedom to act: the need to comply with the standards set by the franchisor.

2. Regular royalty deductions decrease net profit, especially during the startup phase of the business.

3. Dependency on the main brand's reputation: any scandal surrounding the franchisor will negatively affect all partners.

4. Inability to sell the business without the franchisor's consent.

5. The risk of the franchisor's bad faith, who may not provide the promised support.

The main risks for the franchisor:

1. Loss of control over the quality of products or services at the franchisee, which can harm the entire brand.

2. The risk of disclosing commercial information and know-how to competing companies.

3. Difficulty in terminating the agreement with an unscrupulous partner.

4. The potential for subsidiary liability for the debts of the franchisee.

5. Conflicts among franchisees regarding territories and clients.

Therefore, before signing the agreement, it is important to thoroughly study all conditions, analyze the risks, and ensure the reliability of the potential partner.

Common Mistakes When Concluding a Franchise Agreement

Many entrepreneurs, especially novices, make common mistakes when concluding a franchise agreement. Here is a list of the most frequent mistakes to avoid:

1. Insufficient analysis of the franchisor's business before signing the agreement. It is important to study their financial reporting, reviews from current franchisees, and the history of legal disputes.

2. Ignoring consultation with an independent lawyer specializing in franchising. One should not rely solely on the documents provided by the franchisor.

3. Misunderstanding all financial conditions: it is necessary to accurately calculate the initial fee, royalties, marketing deductions, and startup budget.

4. Failure to clearly define the area of activity. The agreement must specify whether the territory is exclusive and what sanctions are provided for opening another outlet nearby.

5. Not paying attention to the quality standards section. It should be understood how strict the requirements are and what consequences will follow for their violation.

6. Ignoring the provisions regarding early termination of the agreement. It is important to know under what conditions one can exit the agreement without financial losses.

7. Failure to include mechanisms for dispute resolution. The agreement should contain a clear procedure for mediation or arbitration.

8. Lack of analysis of the competition in the chosen territory. Even a well-known brand may not succeed if competing networks are nearby.

9. Underestimating marketing and advertising costs, which may significantly exceed the marketing deductions.

10. Signing the agreement without a preliminary pilot launch or testing of the products.

To avoid these mistakes, it is necessary to allocate sufficient time for preparation, involve professional consultants, and carefully work through each clause of the agreement. Remember that franchising is a long-term partnership, so the quality of the initial agreement directly affects the future success of the business.