Franchise Agreement: 5 Things to Look Out For

20/09/2017 13:00 | Start a business

Franchise agreement issues to be aware of

Just like a pre-nuptial arrangement, a standard franchise agreement details the rights of each party during the relationship, as well as setting out the processes involved in ending it. Romantic, right? Well, it may not be as exciting a read, but a franchise agreement is a legally binding document between a franchisor and franchisee and needs to be understood. The agreement is often a lengthy document which can be difficult to interpret at times and so its advised that you seek professional guidance before you sign on the dotted line. You can find a list of specialist franchise solicitors who are affiliated with the British Franchise Association to review the franchise contract with you.

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So, what is a franchise agreement? Quite simply, its a document that outlines in legal terms how the franchisor / franchisee relationship works with respect to rights and obligations. Therefore, its important that youre fully aware of what is expected of you with help from a professional who will interpret some of the more complex terms. Many franchisees make the mistake of not consulting an expert because they believe that the franchise contact is standard and cannot be negotiated or amended in anyway. Choosing to save money on solicitor fees instead, this decision can result in prospective franchisees not having a full appreciation of the legal obligations they will be bound by. Seeking advice and support to review the standard franchise agreement is not just for proposing changes to the franchise contract, however amendments can be suggested where appropriate.

By not taking advice, youll run the risk of entering a contract without a full grasp of the small print which could end up being an expensive mistake. So, what are the 5 key terms that you should look out for in a UK franchise agreement?

Read more: Five reasons why the franchise agreement is in favour of the franchisor

  1. Length of the agreement

    There are two elements to the length of a standard franchise agreement that need to be considered. Firstly, every franchise contract has a fixed term which means that they will come to an end. The length of the term can vary, but is usually 5 years. Make certain that youre aware of the notice that you need to give if you decide you want to renew the contract. If you miss the deadline, the franchisor may believe that no longer want to continue with the franchise and arrange for another franchisee to take over your location at the end of the term. Read more: Franchise agreements and the law.

    On the flipside, its a common misconception that franchisees have the right to quit the business at any time. However, unlike an employee or the owner of an independent business, a franchisee cant simply resign if things are not going according to plan. In most UK franchise agreements, a fixed term from a legal standpoint is exactly that, fixed. Its very unlikely that the franchise contract will include a get out clause for the franchisee. This means that the only ways that the agreement will end is through the contract running its full term, the franchisor terminating the relationship for breach, or when the franchisee sells the business.

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  1. Selling the business

    As detailed above, a franchisee does have the right to resell the business, but what should be remembered, is that the sale is conditional upon the franchisor approving the potential buyer. The reason that the franchisor has the final say is because the prospective franchisee will carry the franchises brand name and operating system. The franchisor will want to ensure that the new franchisee meets the same criteria that you did when you bought the franchise.

    And even when the franchisor has approved the sale and a price has been agreed, you may still be left with a fee to pay. The franchisor may have found the new buyer on your behalf. This could be an existing franchisee from another territory, or someone who has attended a discovery day, but youll be left with a commission fee to pay as way of a thank you for the introduction. Read more: Franchise Agreement: 5 Things You Should Know
  2. Renewing the franchise contract

    Use of the term renewal can cause confusion in a standard franchise agreement because its assumed that its an extension of the original franchise contract. This isnt the case however, and at renewal, the franchisee will enter into a new franchise agreement that may have amended terms and obligations.

    In most cases, youd have the right to enter a new franchise contract if all obligations had been satisfied during the original term and minimum performance standards and targets had been met. As already mentioned, there is a notice period where you must inform the franchisor of your intention to renew the franchise. This time frame varies from contract to contract so ensuring you know this deadline date is very important.

  3. Territory

    The size and make-up of the territory that youre granted as part of the franchise agreement may determine the future profitability of your business, so make sure you review this section carefully. Is the area aligned to your target market? Is the territory in a town or rural location? Are you being granted exclusivity for your territory? These are questions that you need answered to allow you to understand the potential impact they have on your ability to run a successful business. Read more: Are Franchise Agreements Non-Negotiable?
  4. Fees and charges

    A standard franchise agreement should document all fees very clearly, so that youre not hit with hidden charges after the contract has been signed. Typically, costs paid to the franchisor include the initial franchise fee, a monthly royalty fee and a contribution towards marketing costs. If youre uncertain about the fee structure, or what youre likely to be paying in ongoing costs, make sure you discuss this with the franchisor.

Read more: Will My Franchise Agreement Be Automatically Renewed?

When investing in any UK franchise, the list of obligations on the franchisee under the franchise agreement can be daunting. Its important that you read the contract in detail and ensure that, on a practical level, youre able to fully comply. If you and your solicitor are happy with the franchise contract, then this agreement will set you on the path towards commercial success.

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