Considering taking on a franchise? Pay attention to the franchise agreement
If you take on a franchise, you will invest a great deal of time and money into the franchised business and the franchisor will be making a substantial commitment to you. It is crucial that a well-drafted document is put in place at the outset to give you certainty and prevent misunderstandings and costly disputes.
The Franchise Agreement is the key document which sets out the legal and practical relationship between the franchisor and franchisee.
A typical draft franchise agreement is a complex document. Ask us to discuss it with you and provide advice before you commit. Here are some points to consider:
- Be sure that you know how long the grant of the franchise lasts, how it can be renewed or terminated and at what cost.
- Will you have exclusive rights in the area? What is the exact extent of the geographical area covered by the agreement and how are the borders determined?
- What fees are payable? Fees often include initial set-up fees, on-going management fees, royalties and joint marketing fees.
- How are goodwill and intellectual property to be treated? Are there restraint of trade clauses limiting what you do after the franchise agreement has terminated?
- What level of business support will your franchisor give you? This can be vitally important in the early stages of trading.
- What restrictions are there on your management of the business? The franchisor is providing a business model that is tried and tested and whose success depends in part on conformity from one franchise to another. Therefore, most franchise agreements will place restrictions on what you can and cannot do, where you buy stock, how often reports must be submitted to the franchisor, and the way in which you manage, insure and, in many cases, staff your business and obtain premises.
- How will you be able to exit from the relationship especially in the event of ill-health?
Make sure that you see all documents referred to in the franchise agreement such as operational manuals. It is as important to have a grasp of the systems and procedures as it is to understand the legal rights and obligations.
Franchise agreements are usually lengthy because they try to detail a complex business relationship. If you are thinking of taking on a franchise be sure to talk to us as soon as possible.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.