Franchise agreements
Franchisor Considerations
As a Franchisor, what terms should be in your Franchise Agreement?
As a franchisor your key concerns will be to ensure that your brand, know how and goodwill are protected, that you receive payment for allowing others to use your know how and experience in their own business, and that if the a franchisee is in breach of the agreement that you can bring it to an end. Your franchise agreement must therefore be comprehensive and enforceable. It will usually be in a standard form and therefore it is important to get it right from the start, otherwise, any errors will apply to all your franchisees.
Equally, if your agreement is unreasonable or does not address all the issues that will be important to a franchisee, you risk losing potential franchisees or may have to provide side letters amending the agreement to ensure a franchisee proceeds; this is not ideal when all franchisees should be treated the same.
A comprehensive agreement will contain many provisions, the main ones are:
A warranty confirming that you own your brand and associated intellectual property (your brand is often what attracts a potential franchisee; they will want to ensure that the brand they are paying for belongs to you and that you have the legal right to prevent infringement of it).
Restrictions on the use of your intellectual property, that is your trade marks, goodwill, know how, copyright, trade name etc, other than as permitted within the agreement. In particular on termination of the agreement you will need to:
specify what is to happen to any equipment, clothing, stationery and signage bearing your branding; and
restrict outgoing franchisees from competing with you and using your know how to do so (note however only reasonable restrictions will be enforceable).
Reasonable provision governing the sale of the franchise business to a third party. A franchisee must be entitled to sell their business, but it is appropriate for you to have a right to vet and approve any incoming franchisee. Such terms should be reasonable and you should take account of the fact that many franchisees will choose to operate their business through a limited company, so the agreement should recognise the franchisee’s right to sell the shares in that business as a means of selling on the franchise.
An option to take over the franchise business in the event of the franchise terminating. Such an option will give the opportunity to decide whether this is in your best interests and will include the basis of valuation for any purchase - this may vary dependent upon whether the option arises as a consequence of the agreement coming to an end, or being terminated due to a breach.
Clear provisions as to what constitutes a breach of contract and the consequences of that beach – i.e. is it a fundamental breach, which will terminate the agreement, or is it a breach that will permit you to override any exclusive territory rights granted to a franchisee?
Clear provisions as to both your obligations and those of the franchisee. If a franchisee has to meet certain targets these need to be clearly set out and reasonably achievable based on your own business model.
A right to carry out an audit of the franchisee’s accounting information to ensure compliance with the fee payment obligations.
The franchise agreement is a key asset of your franchise business. A properly drafted agreement, which deals fairly and reasonably with the issues arising in the franchise relationship, will not only protect your business interests, it will help sell your franchise network to potential franchisees by identifying you as a quality business.
Advice and assistance from a lawyer who specialises in franchise agreements and who understands the issues from the franchisor’s and franchisee’s perspective will be invaluable in ensuring you have a contract on which you can rely.
At Birkett Long Solicitors our team can offer expert advice on all aspects of franchising. Contact Tracey Seath on tracey@franchise-uk.co.uk
