Franchising A-Z: Franchise Agreements Setting expectations for all parties

In the latest article in our A-Z series, ServiceMaster’s David Burton tackles the franchise agreement: What is it? What measures should be included? And how can you ensure it stays in-line with industry standards and ethics?

For any business person investing or moving into pastures new, assessing and protecting yourself from potential risks must be first on your agenda.

For a franchisor, the franchise agreement is your legal documentation designed to not only protect the brand you have developed but also to set out how the relationship between you and your franchisees will work.

The franchise agreement is a legally binding document that sets expectations for all parties. It is designed to benefit both you as the franchisor and your franchisees, however the agreement should allow the franchisor the appropriate rights to make decisions that benefit the wider franchise network.

The agreement is franchisor-led and focuses on your obligations to support your franchisees by providing advice and know-how, marketing commitments, collecting appropriate royalties, investing into the network and protecting the brand from misuse. Remember, the franchisor and franchisees are not partners. The agreement sets out a contractual relationship, not a partnership.

So what should you be including within your franchise agreement? A franchisor should ensure their franchise agreement is in line with the industry code of ethics, which can be found on the British Franchise Association (BFA) website and should include all of the following.

• the rights granted to the franchisor
• the rights granted to the individual franchisee
  
• the goods and/or services to be provided to the individual franchisee
  
• the obligations of the franchisor
  
• the obligations of the individual franchisee
  
• the terms of payment by the individual franchisee
  
• the duration of the agreement which should be long enough to allow individual franchisees to amortize their initial investments specific to the franchise
• the basis for any renewal of the agreement
• 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
• 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
• the franchisor’s right to adapt the franchise system to new or changed methods
  
• provisions for termination of the agreement
• provisions for surrendering promptly upon termination of the franchise agreement any tangible and intangible property belonging to the franchisor or other owner there of

ServiceMaster operates six service lines, which means a number of varied franchise agreements are required to cater for our franchisee base. It is recommended by the BFA to use UK solicitors familiar with the complexities of franchise agreements and the level of investment this requires is quite significant.

However, consider the risks should something go wrong. What is the value of your brand? What would you lose if your franchisee agreements were not water tight? Your investment at this stage will pay dividends down the road.

As with any organisation, macro-environmental factors will have an impact on trading conditions and these will need to be considered within the franchise agreement. Advances in technology, machinery, social media, political agendas or changes in law may all impact the running of the franchise brand so considering how to manage future changes is important.

You might want to consider the use of the operations manual for immediate changes. The franchise agreement is a static document which generally remains unchanged during the term of the agreement, whereas the operations manual is more about the day-to-day running of your business.

Therefore, the operations manual can be readily adapted to your changing business needs. The operations manual is still legally binding on the franchisee, as it should be a requirement of the franchise agreement to comply strictly with the manual.

As a franchisor and a business person, you want to minimise your risk and optimise the chances of success for you and your franchisees.

The franchise agreement is your tool to lessen the amount of long-term risk to your beloved brand, manage the expectations of your franchisees and set out what is required of you as a franchisor.

Take the time to research franchise agreements, invest in an experienced solicitor and sleep easy knowing your brand and your investments are safe.

Missed the previous article in our A-Z series? Read it here.