What is the Franchise Agreement?

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Franchise agreement article

Originally posted on 03/08/2017. Updated on 24/05/2019.

Youíve researched franchise ideas, chosen the right franchise for you and attended a discovery day. So, what happens next? The responsibility lies with your chosen franchisor to give you a copy of the Franchise Disclosure Document. As the name suggests, the Franchise Disclosure Document sets out the necessary information for the franchisee, including the history of the franchise, the annual turnover that a franchisee can expect, the investments required and the franchisee's obligations.

Since the franchisor continues to control many of the business decisions, the franchisee should enter into the relationship with as much information about the franchise as possible. Itís wise to look over the Franchise Disclosure Document with a solicitor to make sure the obligations are fully understood. The importance of the franchisor sharing the Franchise Disclosure Document with the franchisee is detailed in section 3.3 of the European Code of Ethics for Franchising:

ďIn order to allow prospective Individual Franchisees to enter into any binding document with full knowledge, they shall be given a copy of the present Code of Ethics as well as full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of these binding documents.Ē

Once youíve had time to digest the Franchise Disclosure Document, itís time to get down to business and sign the franchise agreement. Hereís where it starts to get scary. The franchise agreement is a legally binding document between the franchisor and the franchisee. Thereís no standard form for a franchise agreement and they can be difficult to interpret at times, so itís advised that you seek professional guidance from a specialist franchise solicitor who is affiliated with the British Franchise Association before you sign on the dotted line. You will be forced to comply with the standards outlined in the agreement for the duration of the contract period, so it is crucial that youíre aware of your legal position.

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What is the franchise agreement?

Quite simply, itís a document that outlines in legal terms how the franchisor-franchisee relationship works with respect to rights and obligations. It covers the provision of goods and services from the franchisor to the franchisee, payment terms, how long the agreement lasts for and what happens when itís time for renewal, the sale of established franchises, expected practice with relation to the trademark and brand, any future adaptations to the franchise system and how to end an agreement.

Now letís look at the agreement in more detail. In line with the franchise code of ethics, a good franchise agreement should cover the following as a minimum:

  • the rights granted to the franchisor
  • the rights granted to the franchisee
  • the goods and services to be provided to the individual franchisee
  • the obligations of the franchisor
  • the obligations of the individual franchisee
  • the terms of payment by the individual franchisee
  • the duration of the agreement (which should be long enough for franchisees to finish paying off their initial investments)
  • the terms for any renewal of the agreement
  • the terms upon which the individual franchisee may sell or transfer the franchised business and the franchisor's possible pre-emption rights
  • provisions relevant to the use of the franchisor's signs, trade name, trade mark, service mark, store sign, logo or other distinguishing identification by the franchisee
  • the franchisor's right to adapt the franchise model
  • provisions for termination of the agreement
  • provisions for surrendering any tangible and intangible property belonging to the franchisor upon termination of the franchise agreement

There is no standard format for the franchise agreement, but a typical contract will have the following clauses:

  1. Definitions and Interpretations
  2. Grant of Franchise
  3. Relocation
  4. Term and Renewal
  5. Fees and Payment
  6. Obligations of the Franchisor
  7. Obligations of the Franchisee
  8. Use of Intellectual Property
  9. Initial Set Up
  10. Procurement and Services
  11. Records and Accounts
  12. Training and Quality Control
  13. Advertising and Marketing
  14. Insurance
  15. Confidentiality
  16. Non-Competition and Non-Solicitation
  17. Termination
  18. Effects of Termination or Expiry
  19. Liability
  20. Notices and Service
  21. Force Majeure
  22. Waiver
  23. No Partnership
  24. Assignment
  25. Entire Agreement
  26. Severance
  27. Set Off
  28. Expenses
  29. Governing Law and Jurisdiction

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Franchise Agreements & the Greater Good

While the purpose of the franchise agreement is to facilitate a mutually beneficial working relationship between the franchisor and the franchisee, it is important to bear in mind that this does not necessarily mean that you will be granted the same rights and privileges as the franchisor. Remember that you are joining the franchisorís business. He or she will likely have spent years building the business from the ground up, taking it from a small, independent outlet with no customers at all to a multi-unit franchise with an established base of loyal customers and a successful business model in place bringing success to entrepreneurs across its network. As a result, the franchisor should prioritise the greater good rather than trying to please individual franchisees. This can mean disregarding your personal interests Ė but you will benefit in the long run if the franchisorís decisions impact positively on the business as a whole.

Of course, this is only true to a certain extent, and specific measures are put in place to ensure that all franchisees are treated fairly. These can be found in the Code of Ethical Conduct created by the British Franchise Association.

Franchise Agreements Are Usually Non-Negotiable

It is simpler for franchisors to create a set of regulations that are applicable to each of their franchisees than develop an adapted version of the franchise agreement for every new recruit to the business. For this reason, franchisees should expect to be presented with a non-negotiable list of rights and obligations. Franchisors might expect investors who want to join the business to either accept all of these conditions without question or move on. For this reason, prospective franchisees should carefully consider each and every aspect of the agreement to make sure that they understand their obligations before they sign on the dotted line. If the franchisor tells you the agreement is non-negotiable and it details something that you arenít sure about or donít feel you would be prepared to do, donít feel pressured into signing, as you may regret your decision further along the line.

Make Sure You Consult a Professional

As weíve already mentioned, itís important that you seek professional advice before signing the franchise agreement. A specialist franchise solicitor will not only take the complexity out of the document for you, but will also make the process quicker and reassure you that youíre signing an agreement that accurately represents your relationship with your franchisor.

The list of obligations of the franchisee in the franchise agreement will be long and very specific. In fact, the entire agreement can be more than 40 pages long. This contrasts with the general obligations of the franchisor, which can be difficult to interpret. You must read each obligation in detail and ensure that, on a practical level, youíre able to fully comply. Also, an experienced franchise solicitor will know whether the franchise agreement details a typical franchise format and is compliant with the relevant code of ethics and UK law and, if appropriate, European law.

All thatís left to do then is start your new franchise business. As a franchisee, your rights and obligations will have been made clear in the Franchise Disclosure Document and franchise agreement. The franchisee obligations include clear rules regarding complying with the business model, maintaining a minimum level of performance, contributing to the marketing fund and purchasing and supplying certain products and services.

The Franchise Agreement & the Future

If you and your solicitor are happy with the obligations, you will be able to adhere to them and ensure that the relationship between you and your franchisor is robust, which will set you on the path to commercial success.

However, you should remember that while a lot of your time will be taken up with reading and considering the franchise agreement in the initial stages of the franchise process, it is a document that is created with the purpose of maintaining the smooth running of your business over the entire contract term. Therefore, you should frequently refer to it to refresh your memory on your obligations. Also, you could use the agreement to settle any disputes that crop up or to work out the best way to terminate the franchise agreement, should you ever decide to move on. In short, the agreement is there for you throughout your franchising journey and should be consulted regularly.

 

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