In the second of a three-part series, corporate and commercial solicitor at West London law firm IBB Solicitors, Sho Matsumiya, takes a closer look at the key provisions of your franchise agreement.
The franchise agreement is one of the two core documents for any franchise. The first thing you will notice when looking at a franchise agreement is that the terms give wide powers to the franchisor.
This is out of necessity, and many franchisees recognise that without this, the integrity of the franchise could be damaged by a rogue franchisee
Key provisions of a franchise agreement
The franchise agreement will set out what rights are being granted to the franchisee, such as to carry on the franchised business and use the intellectual property in relation to that business.
There is usually a fee for the franchisee to buy in to the franchise and which is usually at a standard rate.
There are also other fees payable to the franchisor such as a “management fee” being a percentage of the receipts of the franchised business and the franchisor will have some right or method to see the receipts of the franchisee’s business often by way of a mandatory payment processing system that the franchisor supplies to the franchisee.
There is normally a minimum initial term for the franchise which varies widely and there is usually a mechanism to allow the franchisee to extend that term by agreement with the franchisor provided certain requirements are met.
(4) Franchisor obligations
Some of the key obligations of the franchisor are to assist the franchisee in setting up the franchisee’s business and provide know-how and guidance to the franchisee on an ongoing basis.
(5) Franchisee obligations
The key obligation of the franchisee is to operate the franchised business in accordance with the franchise manual and any other applicable rules and guidelines.
The franchisee will enter into restrictions which will apply during the term of the franchise agreement and for a period thereafter, such as to not be involved with any business which competes with the franchise.
(7) Intellectual property rights
Some of the key assets of any franchise are its intellectual property rights, such as its trademarks, and it is in the interests of the franchisor and the other franchisees that steps are taken to protect, maintain and develop those rights as well as ensuring that the franchisee can exploit those rights for the franchisee’s business.
It is a requirement for the franchisee to have in place suitable insurance to cover a wide range of liabilities including in relation to employees and third parties.
It is unusual for a franchisee to have a contractual right to terminate a franchise agreement before the expiry of the term, however, the franchisor will typically have broad rights to terminate the franchise agreement.
The franchise agreement will also typically set out the consequences of termination and which may include an obligation to pay all sums due to the franchisor and to stop using all intellectual property rights used by the franchise.
One of the benefits of being a franchisee is that if the franchisee wants to sell their interest in the franchise, they can sell it to the franchisor or a third party approved by the franchisor which provides them with an exit route which can be important for some franchisees.
Typically, a franchise agreement will require a franchisee who wishes to sell their franchise to first offer that franchise for sale to the franchisor and if the franchisor declines then, provided the third-party purchaser is approved by the franchisor, the franchisee can sell their franchise to that purchaser.
For more information on creating or reviewing a franchise agreement please read on.
What are the advantages and disadvantages of franchising your business?
Sign up to our newsletter to get the latest from Business Advice.