As franchising continues to be a popular means of operating a business, franchising solicitor at Keystone Law, Lyndsay Gough, shares some useful pointers for prospective franchisees about the typical contents of the franchise agreement, which sets out the legal framework between the franchisor and the franchisee.
Why is a franchise agreement important?
In essence, franchising is the licensing of a business format by a franchisor to a franchisee, allowing the franchisee to operate his own business under the franchisor’s brand using an established business method. In order to maintain uniformity of goods or services across the franchise network, there must be a uniform franchise agreement to control quality and standards. Think of any McDonald’s franchise – the Big Mac is the same the world over.
Why is a franchise agreement so one-sided?
A franchisee should not be discouraged by what appears to be a very one-sided agreement in favour of the franchisor. It is this degree of control by the franchisor, however, which is at the core of any successful franchise operation, ensuring a uniform quality of customer service which ultimately benefits all franchisees.
Is the franchise agreement negotiable?
The franchise agreement (often over 50 pages long) is usually presented as ‘non-negotiable’, but concessions are often agreed in a separate ‘side letter’, signed at the same time as the franchise agreement.
Is it for an exclusive territory?
A franchisee will want to be protected from local competition, both from the franchisor and its other franchisees and should seek an ‘exclusive’ right to operate in a particular county, city or series of postcodes. Conversely, the franchisor may be reticent to grant exclusive territories, especially where a franchise concept is still developing with capacity for further outlets in a particular area.
What is the duration of the franchise?
Most franchises are for an initial term of five years, to allow franchisees to recoup their initial investment. Ideally there will be a right to renew, but this may be conditional upon the payment of a renewal fee, signature of a new franchise agreement and payment of the franchisor’s legal costs in dealing with the renewal.
What kind of fees will I pay?
There is usually an initial fee at the start of the relationship. There are also ongoing management fees, usually based on a percentage (typically 5-10%) of the franchisee’s turnover, in return for training, advertising and ongoing support. Sometimes there is a separate advertising levy (perhaps 2.5% of gross monthly receipts). Some agreements may require the payment of a minimum fee, regardless of the level of income, which can prove crippling financially for a stagnant business.
What level of support will the franchisor provide?
There must be ongoing obligations for the franchisor to provide support, training and advertising and to continue to protect the brand name.
What obligations will I have to the franchisor?
In order to maintain uniform quality standards for the franchise brand, there must be comprehensive restrictions and obligations which bind all franchisees. A key component is an operating manual, setting out the finer detail of how the franchise must be operated. An errant franchisee who does not comply may severely prejudice the reputation of the entire franchise network.
Can I sell my franchise business?
The franchisor will seek to protect its goodwill in the brand by ensuring that individual franchisees cannot readily transfer their businesses to third parties without some input by the franchisor. A franchisee will want the flexibility to sell a successful franchise to a suitable buyer. Once a buyer has been identified, usually there is an option for the franchisor to buy the business from the franchisor on the same terms. Even if the franchisor decides not to exercise this right of first refusal, it will want to exert some control over the appointment of a new franchisee and to ensure that the seller does not set up in competition.
Franchising as a business model is not a soft option for self-employment and the backup of a reputable franchisor with a proven franchise network is vital to success. The importance of taking sound legal advice before entering into this significant and legally binding relationship cannot be understated. As with any new business, planning is of critical importance and a diligent prospective franchisee will obtain a thorough legal review of the franchise agreement to ensure that it follows a typical format and is compliant with relevant laws. There is no shortcut to success and adequate homework is key to establishing an effective franchise business with a viable exit route.
Lyndsay Gough, a commercial solicitor at Keystone Law, has been advising both franchisors (from fast food operators to handyman services) and franchisees (from business consultancies to jive dance schools) on their franchise operations for over 20 years. Discover more at www.keystonelaw.co.uk, or email firstname.lastname@example.org.