In recent years franchising arrangements have become increasingly popular due to the success of some of the huge food outlets which have multiplied across our town centres.
It is therefore surprising that there is no specific law governing these relationships and accordingly anyone either wishing to create a franchise or become a franchisee will be faced with some fairly complex contractual issues which need careful consideration.
Practical issues to consider when buying a franchise.
On the positive side;
- The business model is already set-up, and the trademarks and various marketing procedures are already established
- A new franchise in a business which is already proven has less chance of failing as a business
- The new franchise may benefit from the support and training of the franchisor, as well as the power of an already established brand
The disadvantages are however equally important:
- A new franchise is often expensive
- Franchisees do not have the same flexibility as a person opening their own business, since third parties need to be given consideration too
- Furthermore the law relating to a new franchise is often highly complex
In summary and to protect both parties there are certain obligations on the parties to a franchise which will need to be well documented in the Franchise Agreement which is governed by the law of contract.
Obligations on the parties to a franchise
The main points to consider are as follows;
An individual Franchisee shall be bound to:
- devote its best endeavours to the growth of the franchise business and to the maintenance of the common identity and reputation of the franchise network
- supply the Franchisor with verifiable operating data to facilitate the determination of performance and the financial statements necessary for effective management guidance, and allow the Franchisor, and/or its agents, to have access to the individual Franchisee's premises and records at the Franchisor's request and at reasonable times
- not disclose to third parties the know-how provided by the Franchisor, neither during nor after termination of the agreement
A Franchisor shall;
- have operated a business concept with success, for a reasonable time and in at least one pilot unit before starting its franchise network
- be the owner, or have legal rights to the use of its network's trade name, trade mark or other distinguishing identification
- provide the individual Franchisee with initial training and continuing commercial and/or technical assistance during the entire life of the agreement.
Both Parties shall;
- Exercise fairness in their dealings with each other.
- The Franchisor shall give written notice to its individual Franchisees of any contractual breach and, where appropriate, grant reasonable time to remedy default.
- Parties should resolve complaints, grievances and disputes with good faith and goodwill through fair and reasonable direct communication and negotiation.
- Agree the terms upon which the individual Franchisee may sell or transfer the franchised business and the Franchisor's possible pre-emption rights in this respect
- Agree the provisions relevant to the use by the individual franchisee of the franchisor's distinctive signs, trade name, trade mark, service mark, store sign, logo or other distinguishing identification
- Agree provisions for termination of the agreement
- Agree provisions for surrendering promptly upon termination of the franchise agreement any tangible and intangible property belonging to the franchisor or other owner thereof
Things to Look Out For in Franchise Agreements
Commonly franchise agreements last for five years and give Franchisees at least two “automatic” renewal options so, provided a franchisee has complied with the terms of the agreement, the franchise will carry on for fifteen years.
By no means all franchise agreements give franchisees an exclusive territory and indeed in a retail based franchise you would generally not expect any exclusivity to be given.
Initially there will be a lump sum capital sum payable by the Franchisees for acquiring the franchise. There is also a continuing fee (very often referred to as a management service fee) which is usually calculated as a percentage of a franchisee’s turnover (8-9% is average) and a marketing/advertising fee to enable the franchisor to promote the brand nationally, of around 2.5%.
Franchisees must comply with the Franchisors operational requirements. These will normally be prescribed in the Franchisors Operations Manual.
The Franchisor will insist upon strict termination rights to enable them to bring the franchise to an end if the Franchisee is acting in a way that brings the brand into disrepute.
There will be provisions to prevent a Franchisee from operating a similar or competing business following termination or expiry of the franchise agreement and unlike similar restrictions in employment contracts, these are generally enforceable.
If the Franchisee is going to operate a franchise through a limited company, then the Franchisor will require a personal guarantee from the one or more individuals who have established the franchise company.
Before signing any franchise agreement or other franchise legal documents, it is vital that you seek legal advice from a solicitor who specialises in franchising. It is no use using the same solicitor you used making a will as though they may be very good at what they do, they are not franchise legal experts. This is a very complex legal area and it is worth getting the right expert.
Please Note: This document is for general information only. It is not legal advice and should not be acted or relied on as being so. It does not create a solicitor-client relationship between Temple Legal Solutions Ltd and any other person. Legal advice should be taken before applying any information in this document to any facts and circumstance.
If you contact Temple Legal Solutions or call 01483 514814 to make an initial enquiry, you will then referred to an appropriate, experienced law firm.