When setting up a startup, you have several options. Which one you choose will depend on the size of your business, whether you're in a partnership and the level of risk you're willing to take on.

One option is a franchise. For many consumers, this word conjures up big names like McDonald's, Pret a Manger and Subway. But in fact, many smaller firms enter into franchise agreements too.

The way a franchise works is by giving another business permission to sell your goods under your name. The licensed partner is given the chance to buy into an existing business rather than starting from scratch.

To enter into a franchise agreement, the joining business has to pay a fee or royalty payment in exchange for the trading name, as well as marketing, equipment and training.

There are a number of pros and cons to a franchise arrangement, but one clear advantage is that the joining member takes on a lower level of risk than if they go it alone. In other words, they're protected by the success of the existing franchise.

Key terms in franchise agreements are "franchisor" and "franchisee". The franchisor is the existing company, and the franchisee is the smaller business that's taken under its wing.

If you're looking to join a franchise, there are two main things to consider. One is whether you think it will suit you better than working as a sole trader, limited or unlimited liability company, in a partnership or as a private limited company. Each of these has its own pros and cons.

The second consideration is what type of franchise agreement to choose. There are three main types: the business format franchise, the management franchise and the product distribution franchise.

Business format franchise

This is the most popular type of franchise and is the one used by high-street giants like Costa, Subway and KFC. It provides the franchisee with a "business in a box" that's ready to run. That's why a trip to McDonald's in Great Yarmouth will closely resemble one in Carlisle.

The franchisee pays the business a fee and in return gets the rights to use the brand name and trademarks. But their day-to-day operations are pretty much set in stone – everything from brand identity to staff uniforms is set by central management.

While the franchisor is in charge of the overall business plan, their level of involvement with the franchisee can vary. Some supervise the franchisee closely while others take a more hands-off approach.

Business format franchises can suit less experienced business owners. You're given guidance and support from a management team with a proven record of success. Your main role is to interact with customers and give them the experience they expect from the franchise.

Of course, the downside of this is that you don't have the wiggle room to put your fingerprints on someone else's branch.

Management franchise

This type of franchise involves more behind-the-scenes work and less customer interaction. Your role is to manage a team along with marketing, recruitment and strategy – in other words, to focus on growth rather than day-to-day operations.

As with business format franchises, management franchises come at a price. In exchange for this fee, you get training, support and guidance from the franchisor.

This type of franchise will suit small business owners who enjoy managing a team.

Product distribution franchise

Finally, there are product distribution franchises. These are similar to brand licensing in that a franchisor provides the franchisee with products to sell.

A product distribution franchise is the most hands-off variety of franchise. The franchisee isn't closely bound by the franchisor's regulations and can make independent decisions about opening hours, staff uniforms, branding and the rest.

There will still be franchise guidelines to follow, but they'll be far less restrictive than in the other two types of agreement.

Unlike the other two kinds, product distribution franchisees don't receive any support or training in return for their fee. They're essentially paying to stock up on desirable goods.

This lack of training may make a product distribution franchise unsuitable for a less experienced business owner. But it allows more confident entrepreneurs to tap into a thriving customer base, safe in the knowledge that their goods are in demand.

Pros and cons of becoming a franchisee

While these types of agreements differ in detail and suit different kinds of business owners, they all share the fact that you're working for a larger company. Your profits aren't entirely your own, you aren't able to make bold decisions independently and you might even find yourself in competition with another branch from the same franchise.

On the flip side, you're tapping into an existing customer base and the resources of a company with a proven track record of success. In many cases, this makes it less risky than setting up on your own.

Where do I sign?

When entering a franchise agreement, you have to sign a contract with the franchisor. This will set out:

• Each party's rights and responsibilities.
• Information about fees, royalties, expenses and commissions.
• What happens if either side breaches the agreement.
• A procedure for settling disputes.
• Expectations relating to confidentiality.
• Intellectual property rights.
  
  

Entering into a franchise is a big deal – not least because it involves paying upfront fees.

As with all business agreements and contracts, you can go it alone and scrutinise the paperwork yourself – or you can have a solicitor on hand to help you decipher the small print.

Commercial lawyers can help you review existing agreements and negotiate changes – or, if you're a franchisor, draft an entirely new agreement.

So whatever type of franchise agreement you enter into, make sure you're receiving the right advice.

At Milners, we have a team of experienced commercial lawyers here to help you – whether you're joining a franchise, are setting one up or are involved in a franchise dispute. We offer swift, straight-talking advice and real results. Contact us today for a free, no-obligation consultation.