Franchise agreement review: What Franchisors need to know

Franchise agreement review is a service which is provided by most, if not all, specialist franchise lawyers, usually for a low, fixed fee.

Franchise agreement review: What Franchisors need to know

Franchise agreement review is a service which is provided by most, if not all, specialist franchise lawyers, usually for a low, fixed fee (often a fraction of the investment that the prospective franchisee is about to make). Therefore, it comes as no surprise that anyone who is looking to buy a franchise should always get one. The purpose of a franchise agreement review is not to aid a negotiation between a franchisee and a franchisor but rather to summarise to the franchisee the main provisions of the agreement, draw their attention to clauses which are particularly important (such as fees for example) and to highlight any provisions which may be unusual, unworkable or unreasonable (if there are any). A franchisee who receives a report stating that the franchise agreement is well written and contains no unusual or unworkable provisions will be reassured and presumably happy to proceed. But, if the review is for the franchisee, why should franchisors be interested in franchise agreement reviews? 
There are a number of reasons why franchisors should be interested and should build the requirement for a prospective franchisee to obtain a franchise agreement review into their recruitment process.

First and by far the most important reason – for its own protection!

If a prospective franchisee obtains a franchise agreement review and you, the franchisor, have evidence that they have done so, then it will be so much more difficult for the franchisee to claim in the future that they were not aware of a particular requirement or that they did not read or didn’t understand what the agreement said. For example, the franchisee would not be able to argue that they didn’t know that after termination or expiry of the agreement they would not be able to be involved in a competing business for a period of time. 
There seems little sense in investing money into having a great franchise agreement if you can’t actually rely on. And since obtaining a franchise agreement review will cost franchisors absolutely nothing, it is a no brainer that franchisors should encourage if not make compulsory.

It is also very rare for the report not to identify some issues

It is likely that there will be at least a handful of provisions where the prospective franchisee will be advised to discuss them with the franchisor (even if only to for clarity or more information). Also, the reports that franchisees obtain should highlight the same queries; so you, the franchisor, can be prepared and have the information ready and perhaps even use this knowledge to prepare an FAQ document which you can issue with to your prospective franchisees alongside your franchise agreement. They will be grateful for this additional information and reassured that you are taking a pro-active role.

Finally, unless you have an in-house legal team or an external franchise lawyer on a retainer?

This may be helpful in answering the question of “How often should I review my standard franchise agreement?”. If your prospective franchisees are obtaining franchise agreement reviews then you can rest assured that any issue with your franchise agreement is likely to be picked up (provided of course it is being reviewed by a solicitor who specialises in franchising!).
In summary, obtaining a franchise agreement review is essential not only for franchisees but should also be an fundamental part of the process for franchisors. If you are going to include this as part of your recruitment process, ensure that the recommendation or requirement to obtain a review allows the franchisee plenty of time to actually organise one and have time to digest the report and raise any questions with you. It is no good telling the franchisee about it the day before the franchise agreement is signed (or even after which I have also seen happen). And don’t forget to ensure that this is also included in your resale process and, again, is done at the right time!

Natalia Shvarts
Natalia Shvarts