🕒: Five minutes
After you have assessed the business proposition and the franchisor, researched the industry and the franchise opportunity you would like to invest in, you should be ready to sign on the dotted line! You should, with the legal help of a solicitor analyse the franchise agreement, and ask the following questions in this article to make sure you are getting the best deal for your investment.
The franchise agreement is the legal, written document that governs the relationship between the franchisor and franchisee. It specifies the terms of the franchise contract, including the rights and responsibilities of each party, fees and payments, territory and duration of agreement. In the case of a dispute, a judge will use the franchise agreement as proof of the terms and conditions of the contract. The franchise agreement must be disclosed at least five days prior to signing any contract with the franchisor. This wait period is intended to prevent the prospective franchisee jumping in and signing the contract before they have reviewed and considered the terms of the agreement.
Checklist – the franchise agreement
The franchise agreement is a legally binding document tethering the franchisee to the franchise operation. It will specify the rights and obligations of the franchisee to the franchise business, and the obligations of the franchisor to the franchisee. It will include the following main clauses (additional clauses may be added depending on the franchisor in question):
- Franchisor’s responsibilities.
- Franchisee’s responsibilities.
- Franchise territory.
- Duration of franchise agreement.
- Renewal of the franchise.
- Financial fees.
- Training and support.
- Confidentiality restrictions.
- Competition restrictions.
The key questions that should be answered by your franchise agreement
- What is the duration of the franchise agreement? It should last for a sufficient period of time to allow the franchisee to recoup their investment.
- Will the franchisor allocate a specific territory? If so, is it exclusive?
- Will the franchise business depend on the sale of goods? Will the franchisor supply these goods? Who will control the retail prices?
- Will the franchisor recover income from profit on the sale of goods to the franchisee under an exclusive purchase agreement?
- Is there a minimum package (stock, equipment or staff) which must be maintained by the franchisee? Does the franchisor supply any, or all, of this package?
- What are the levels of the initial fee, continuing payments (including advertising contribution) and any other contribution payable by the franchisee? How are they calculated, and how frequently are they paid?
- Does the agreement impose a minimum performance requirement? If so, how much is it and for what period of time? What are the consequences of non-achievement of the minimum performance target (e.g. termination, non-renewal of the agreement)?
- What are the consequences if the franchisee becomes incapacitated or dies? Will the agreement be terminated? Will the franchisor appoint new management? Will the franchisee's family have the option of continuing the business?
- Does the agreement comply with the regulations and code of ethics of your national franchise association?
- What are the conditions under which the franchisor may terminate the agreement? What is deemed to be a 'fundamental breach of agreement'?
- What are the conditions under which the agreement may be renewed?
- Under what conditions may the franchisee terminate the agreement prior to its expiration date?
- Will the franchisee be compensated for any 'goodwill' created during the term of the agreement should he/she decides not to renew the contract?
- Will the franchisor require a block insurance policy or be named on a policy taken out by the franchisee?
- What constitutes as the franchise system's intellectual property rights? Who owns them? How are they protected (e.g. patents, registered trade marks etc)?
N.B. The relationship between franchisor and franchisee is governed by a contract. It is crucial that you seek professional advice when negotiating your contract, preferably from a lawyer who has experience of franchise agreements.
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