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Franchise Agreements

Franchises

There are clear advantages of investing in a franchise which might include:

  1. the opportunity to work from an established and proven business model;

  2. initial management training and continuing management assistance; and

  3. access to national market research along with advertising and marketing assistance.

However, before you sign a formal agreement with a franchisor, you should also consider the disadvantages.

For example:

  1. there may be little room for autonomy and innovation;

  2. you may have to submit to ongoing scrutiny by the franchisor; and

  3. there may be ongoing payments/royalties to the franchisor.

The Agreement

The franchise agreement sets out details of the franchise together with the roles of the franchisor and franchisee. Whilst such agreements usually cover similar material, there is not a standard form as terms, conditions and operations may vary considerably from franchise to franchise.

Often, the franchise agreement will contain/refer to the following elements (though there may not be a clear distinction):

  1. an agreement to purchase. It will cover such things as the price, services provided by the franchisor, equipment and other inventory supplied etc;

  2. a licence to operate the franchise. The franchisee’s rights may include exclusivity, use of trademarks, copyright, knowhow etc. There are also likely to be restrictions on such things as suppliers, operations, insurance, advertising etc; and

  3. the operations manual. This sets out in detail the rules and procedures for operating the franchise.

The franchise agreement is often very protective of the franchisor. It might contain, for example, provisions allowing the franchisor to unilaterally change material details of the franchise after the agreement has been signed. There are clearly significant risks in accepting such provisions.

Homework

Aspiring franchisees should do their homework before purchasing a franchise and get a professional to review the agreement before signing. A good legal adviser will highlight the risks inherent in the document and be willing to negotiate on the franchisee’s behalf with the franchisor.

Even if some parts of the agreement are non-negotiable, it is one thing to take on and accept risks that you are aware of but it is another to take on risks that you do not know exist!

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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