A franchise agreement is a document that outlines in legal terms how the franchisor/franchisee relationship works. The contents of a franchise agreement will vary depending upon the franchise system but in essence it grants the franchisee the right to sell certain products or services under a branded name and/or logo for a specified term in return for the payment of certain fees to the franchisor. This may be from a specific premises or within a defined territory.
A franchise agreement will almost always be weighted in favor of the franchisor to enable the franchisor to ensure control over its franchise network. This is of vital importance to the long term success of the franchise business and protects the interests of both the franchisor and the franchisee. A franchisor must be able to act decisively and authoritatively if a situation arises that damages, or may damage, the network’s reputation or the uniformity of its offering and a franchise agreement should be read with this in mind.
The majority of franchisors, in particular mature franchisors, will not allow their franchise agreement to be subject to negotiation. The reason for this is so that the franchisor can ensure that all of its franchisees within its network are operating on the same legal agreement.
A franchise agreement is often a lengthy document which can be difficult to interpret at times and so it is advised that you seek professional guidance before you sign it. Even if a franchisor has indicated that the franchise agreement is non-negotiable, it is advisable that you ask a solicitor to review the agreement and to prepare a report on it. The report should highlight the key commercial terms and forewarn you of any provisions within the agreement that are unusual or unfair. If, ultimately, any variations to the franchise agreement are agreed then these would usually be documented in a side letter.
At the same time as preparing the report the solicitor helping you should also check to see that the franchisor has registered trademarks in relation to the brand name that it is trading under. This is important as you do not want, at a later date, to find out that the franchisor has no rights to trade under a particular name and you are paying the franchisor good money to do so.
You must always seek to use a solicitor who is an affiliate of the British Franchise Association (BFA) to prepare the report, as a BFA affiliated lawyer will understand franchising and be familiar with the terms in the agreement. A solicitor who does not understand franchising will often seek to negotiate and amend the franchise agreement. They will often advise a franchisee that the agreement is unreasonable and should not be entered into. This may also prove an expensive and futile exercise.
Solicitors who are affiliates of the BFA should offer you a fixed fee for preparing a report. Fixed fees will vary and you should not necessarily opt for the cheapest quote. It is wise to agree the fee and the timetable in advance, whilst enquiring as to the franchising work the solicitor undertakes, so as to ensure that you are dealing with a solicitor who is experienced in franchising.
Overall the report should be a guide in assisting you as to whether you wish to proceed with the franchise. It is essential however that you carry out your own due diligence and investigation into the franchise network before signing the franchise agreement. There are various factors for you to consider:
- Is the franchisor a member of the BFA? Whilst many well-known brands are not BFA members, BFA members are required to comply with the BFA’s Code of Ethics to ensure that they franchise in an ethical manner.
- Do you understand the true costs involved in setting up and operating the business and do have sufficient funds to ensure that you are not only able to start the franchise but to trade through the initial start up phase when costs can be high and income low?
- Have you spoken to current franchisee to find out if they are glad that they joined the network?
- Have you asked the franchisor what the failure rate in the network is
- Is the documentation provided to you by the franchisor prepared in a comprehensive and professional manner? Where you are provided with documentation, which is of poor quality, it is an indication that the franchisor has not invested in the correct advice and invested sufficiently in setting up the business and may well be an indication of the likely level of support you will receive going forward.
Starting a franchise is a life changing decision requiring long term commitment and financial contribution. You should take your time and ensure that you are comfortable that you are making the right choice before signing the franchise agreement.
