What is the franchise agreement?

03/08/2017 08:00 | Start a business

Franchise agreement article

Youíve researched franchise ideas, youíve chosen the right franchise for you and attended a great 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 document serves as the disclosure for the franchise. 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 to avoid future problems. 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.í

Once youíve had time to digest the disclosure document, itís time to get down to business and sign the franchise agreement. And 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. While the terms of the agreement may be presented as non-negotiable, itís still crucial that youíre aware of your legal position.

What's in the franchise agreement

So, what is a 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 is for and what happens at renewal time, the sale of an established franchise, 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 whatís contained within 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 individual franchisee
  • the goods and/or 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 to allow individual franchisees to amortize their initial investments specific to the franchise
  • the basis 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 in this respect
  • provisions relevant to the use by the individual franchisee of the franchisor's distinctive signs, trade name, trade mark, service mark, store sign, logo or other distinguishing identification
  • the franchisor's right to adapt the franchise system to new or changed methods
  • provisions for termination of the agreement
  • provisions for surrendering promptly upon termination of the franchise agreement any tangible and intangible property belonging to the franchisor or other owner thereof

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

Consult the professionals

As weíve already mentioned, itís important that before signing the franchise agreement you seek professional advice. A specialist franchise solicitor will not only take the complexity out of the document for you, but will make the process quicker and give you peace of mind that youíre signing an agreement that accurately represents the relationship with your franchisor. An experienced franchise solicitor will know whether the franchise agreement follows a typical franchise format, is compliant with UK law or if appropriate, European law, and the relevant code of ethics.

All thatís left to do now is make a success of 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 and obvious points such as the duty to comply with the business model and maintaining a minimum level of performance. Other requirements include contributing to the marketing fund and an obligation to purchase and supply products and services.

The list of obligations of the franchisee under the franchise agreement will be long and very specific. This contrasts with the more 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. If you and your solicitor are happy with the obligations, then following these will ensure that the relationship between you and your franchisor is robust and will set you on the path towards commercial success.

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