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The essentials of a franchise agreement


Franchise solicitor Manzoor Ishani outlines what should be in a franchise agreement.

 

What needs to be in a franchise agreement

A franchise agreement provides a strong foundation

A franchise agreement should achieve three fundamental objectives:

FIRST: It should set out clearly what the franchisor has promised

SECOND: it should seek to protect for the benefit of both franchisor and franchisee, the franchisor’s know-how and the brand

THIRD: It should clearly set out the rules the parties are expected to observe.

(a) The Terms

Because there is no special law for franchising, the franchise agreement becomes important in determining the rights and obligations of the franchisor and the franchisee and their relationship.

If difficulties should arise between the franchisor and the franchisee, they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.

What then should a prospective franchisee look for in a franchise agreement?

The franchisee should expect his franchisor to:
(i) Train the franchisee and his/her staff
(ii) Supply goods and/or services
(iii) Be responsible for promoting the brand
(iv) Assist the franchisee where appropriate, to locate and acquire premises and have them fitted out and converted into a franchised outlet. This is particularly important in a fast food franchise
(v) Assist the franchisee to set up business
(vi) Improve, enhance and develop the franchisor’s concept and system (including new menu items); and
(vii) Provide ongoing support.

A franchisor will wish to:
(i) Ensure the franchisee does not disclose confidential information (recipes, processes, etc)
(ii) Protect its know-how, brand and network
(iii) Control the use by the franchisee of the franchisor’s know-how and system; and
(iv) Protect its network from unfair competition from former franchisees.

(b) The Brand and Know-how

Unless the franchise agreement contains sufficient safeguards to protect the franchisor’s know-how, brand, system and confidential information, the franchisor may find it is unable to prevent infringement of its rights by a third party or an ex-franchisee.

If the contract is weak, franchisees will not consider the franchise to be a sound investment because the franchisor will be limited in what it can do to prevent “copy-cat” operations springing up in direct unfair competition.

(c) The Rules

All franchisees should be treated as a family and, as such, there should be no room for favourites. Franchise agreements are in a standard form and best practice requires that all prospective franchisees are offered the same terms with no special deals being done.

A franchisee is therefore invited by the franchisor to “take it or leave it”. If a franchise agreement is not negotiable then it is important, from the franchisee’s point of view, that it is not only legally sound but also workable in terms of the rights and obligations of the parties.

The franchise agreement should therefore clearly:

(i) Specify the duties and obligations of the franchisor and franchisee
(ii) Deal with the payment of franchise fees and the timing of those payments; and
(iii) State the grounds on which the franchisor will seek to terminate the franchise agreement and what happens to the franchisee after termination.

For the franchisor, the franchise agreement is an income producing asset which will ultimately have a place in its balance sheet. If the franchise contract is defective, the cost to the franchisor can be the loss of its whole network.

For the franchisee, although he or she may be tempted to rely on goodwill of the person with whom he/she is dealing, ultimately only the contract matters. Whatever the franchisor’s reputation, prospective franchisees will scrutinise the quality of the franchise agreement because they know that, in the future, there may be a change of ownership or policy of the franchisor.

Once a franchise agreement has been signed, both parties are bound by it. It can be a double-edged sword and if either has got it wrong, they will have to pay the price.

For more information

Please contact London franchise solicitor Manzoor Ishani.

This article recently appeared in Food Franchise magazine.

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