Striking a franchise deal is always an exciting prospect but it pays to keep your head. Knowing the ins-and-outs of the franchise agreement will ensure you have a happy partnership for years to come
Whether you’re a franchisee or a franchisor, by the time you sit down for an agreement often all that’s on your mind is closing the deal. At this point, without legal guidance, it can be all too easy to be tripped up by a loophole and end up in a lot of trouble. Fortunately, Nicola Broadhurst, partner at Stevens & Bolton, is here with a needle and thread to sew up any gaps in your agreement.
For the franchisee, preparing for the deal starts long before you even sit down at the table. “First and foremost see whether the franchisor is a member of the British Franchise Association (BFA),” advises Broadhurst, “because if they are then you know they’ve gone through some level of accreditation process.” Whilst the BFA isn’t able to scrutinise absolutely every element of the agreement it will at least have given feedback and closed up some of the glaring loopholes that may have crept in. Broadhurst also feels it’s worth doing some digging and contacting members of the franchisee network. “Many franchisors just give cherry-picked lists of ones they know are going to say nice things about them,” she explains. “It’s quite hard sometimes for franchisees to find out if a franchise concept is good or not.”
Whilst legal advice can seem pricey, finding you’ve signed an agreement which doesn’t really represent your interests will hit your pockets much harder. As Broadhurst explains: “Getting some legal advice then can be very useful to make sure that you don’t put yourself in a position afterwards that you’ve lost a lot of money.” It’s rare you’ll need representation until it comes to the agreement itself but there are some cases where it’s worth seeking consultation a little sooner. Broadhurst elaborates: “If a potential franchisee is paying a deposit, it’s worth getting legal advice right at that stage because they need to know if the deposit will be refunded or, if it won’t, why it won’t.”
Franchise agreements can be a bit of a shock to those who aren’t used to them. “The main thing that a franchisee needs to understand is the fact that it is not an evenhanded agreement,” Broadhurst states. “It will be weighted very heavily in favour of the franchisor for the obvious reason: the franchisor has got more to lose and they’ve got a network to protect.” Because of this the franchisee is locked into the given term and this is very rarely, if ever, negotiable. “Unless the franchisor is in fundamental breach, franchisees need to be aware that there is no get-out-quick clause,” she says. Additionally, you aren’t entitled to a payout just because you’ve built up the business; choosing not to renew without selling on the franchise means a franchisee can’t expect a return on their equity. As Broadhurst comments: “They will walk away with nothing for their investment.”
The final thing to consider is that if you fail to meet the franchisor’s terms and they need to end your contract, you are potentially liable for the lost earnings up until the end of the contracted term. “The franchisor can sue for damages,” Broadhurst warns. “That tends to come as a huge shock to a franchisee that they might have to compensate the franchisor.”
For a franchisor perhaps the biggest risk is over-eagerness. With the first few franchisees it’s rather easy to get carried away. “Rushing in is not a good idea but most people make that mistake,” says Broadhurst. Having a proper selection process is absolutely vital so having things like an application form and a focused profile that outlines the qualities you require in a franchisee can really help. “You’ll look for the financial credibility,” she remarks. “You’ll also ask whether they’ve got any criminal convictions, bearing in mind obviously under the Rehabilitation of Offenders Act 1974 you don’t have to declare spent convictions.” Additionally a Criminal Records Bureau (CRB) check will be vital in some positions, particularly those dealing with children.
“If possible I would also recommend you actually go and interview the franchisee in their home,” Broadhurst says. “You’ll see whether they’ve got the support of their family or other half, what their actual living circumstances are like and you’ll get an idea of what they’re like character-wise.”
Some of the more legally minded franchisors at this point might fancy forgoing a lawyer and drawing up an agreement themselves. But is this advisable? “It depends on how cavalier your attitude is towards your IP,” Broadhurst responds. Templates are available on the internet for around £50 which a person can use for the basics, but these aren’t without fairly significant drawbacks. “The problem with those is that they’re either not up to date with the law and sometimes even statutes, so the references will be wrong,” she explains. You’d also be missing out on the actual working experience of a franchise lawyer, who has seen what works and where the riskiest ground lies – when court judgements change the boundaries or highlight areas your agreements might be lacking, a lawyer would redraft your agreement to ensure you’re covered as much as possible. “It’s that extra know-how and experience that a professional lawyer will bring,” Broadhurst explains.
What happens when the best laid plans go awry though? How do you handle a breach of contract? “For a breach your starting point is going to be a claim for damages,” comments Broadhurst. “As long as you’ve drafted the specific losses you’re going to be indemnified for, because an indemnity is a stronger protection, you’re allowed to recover the losses that you’ve suffered.” However, despite the additional protection afforded in their agreements, if a franchisee lets them down it’s still hard for a franchisor to recoup the true costs involved. “I’ve got a client whose franchisee has run off to China,” she relates. “I don’t think they’ve got a hope in hades of getting that money back unless they pursue it in China and that in itself is expensive. Which is why I’d suggest franchisors get legal expenses insurance as back-up.”