Reviewing Your Franchise Agreement
You may well be spending as much on buying a franchise as you did on your house; but even if the expenditure is smaller, you need to do much more investigation, as buying a franchise can affect every aspect of your personal life.
Elsewhere on the site, you will find advice on different aspects of the due diligence you should carry out. This article just deals with what you can expect from a Franchise Agreement.
Specialist Franchise Solicitor
Below are a selection of clauses that can be found in a typical Franchise Agreement, but they are intended only to give you a flavour of the Agreement.
There is no substitute for instructing a specialist Franchise Solicitor to advise you on the contents on the Agreement. This is true even if the franchisor says that the Agreement is not negotiable – you need to know what you are letting yourself in for. The British Franchise Association (bfa) lists nearly 50 solicitors all of whom have had to show competence in franchising, and ideally you will instruct one of them.
Because they do this work regularly, they are likely to give you a fixed price for a report which will be lower than the price you might expect from a non-specialist.
Nature Of The Franchise Agreement
The Franchise Agreement is a licence from the franchisor to each franchise owner to use the franchisor’s intellectual property in return for the franchise owner accepting some degree of control over their business and paying fees to the franchisor.
The franchisor needs to be able to control every franchise owner, because if they cannot, then poor service or faulty products from just one franchise owner could damage the reputation of the entire brand.
Imagine what the press would print if a single franchise outlet of a national burger chain gave its customers food poisoning.
Therefore, the agreement will be one-sided in favour of the franchisor. It will also be non-negotiable, because it is not fair to some members of the network if the franchisor grants concessions to others.
Franchisors who are members of the bfa however have an obligation to comply with the bfa Code of Ethics, which requires compliance with certain standards within the Franchise Agreement, and also a requirement that the franchisor must deal fairly with the franchise owner.
Therefore, while not conclusive, it must surely be a good thing to look for a franchisor who is a bfa member.
Terms Of The Franchise Agreement
Franchise Agreements will probably be 25 or more pages long, although agreements with more than 50 pages are common, and some even have more than 80 pages.
They are there to give the franchisor the control that was mentioned above. You can see from this that it is not possible to outline all of the provisions in the agreement, but the following are some of the more commercial
ones. Every entry includes some comments, many of which are about what is not written in the Franchise Agreement as opposed to what is. This is another reason why you should seek advice from an experienced Franchise Solicitor.
The Franchise Agreement will include details on the following:
- Duration – All Franchise Agreements are entered into for a fixed term – usually five years – although a few high investment franchises have longer terms.
- Renewal – The Franchise Agreement will normally give you an automatic right to renew provided that you have been a ‘good franchise owner’.
- Territory – This can be a complicated area in that franchisors rarely give truly exclusive territories these days, although most of their network think that they do.
- Fee structure – There will almost always be an initial fee which will usually cover training – but check carefully what it does cover.
- Franchise owner’s obligations – These will be fairly generic.
- Sale – One of the attractions of franchising is that you can sell your business on, ideally at a profit.
- Death – In the absence of specific provisions, your franchise could well terminate on your death.
- Termination – These should allow the franchisor to terminate for your irremediable breach; but where there is a remediable breach (e.g. if you have not paid your management service fees) then the franchisor, in principle, should only be allowed to terminate if you fail to comply with a written notice to that effect.
- Post termination – In essence, the franchisor will have the right to take over your business and perhaps pay you for its net asset value without any allowance for good will.
What To Do Next
Once you have your report on the franchise agreement from your experienced franchise solicitor you are almost ready to sign.
Once you have carried out the due diligence that other authors on this directory website are pointing you towards, there is one extra precaution that you can take.
In the Franchise Agreement there is a clause, often called the ‘Entire Agreement’ clause, which basically says that if a franchisor has promised to do something for you which is not set out in the Franchise Agreement, it will only be binding if it is recorded in writing between you.
Thus, if you have relied on anything from the franchisor such as financial projections or promises that they will give you a specific amount of support, to name just two, make sure that this is recorded in writing and then bound into the back of your Franchise Agreement or at least referred to in it. If you do not do this, all of your good work could be undone.