What is the legal process to buying a franchise in the UK?
The purchase and operation of a franchise business is usually governed by several different contracts throughout the franchise process. Generally in the exploratory stage the franchisor will ask the prospective franchisee to sign a confidentiality agreement. This agreement ensures the franchisor can share trade secrets and other information with the franchisee that will aid in the latters due diligence process. It is therefore vital a potential franchise seeks franchise legal advice.
Most lawyers will recommend prospective franchisees make the agreement a two way agreement, and refuse to sign anything with non compete provisions. This way if the prospective franchisee ultimately decides to start a franchise business in the same industry they will not be legally barred from doing so.
What is a franchise deposit agreement?
The second stage of signing a franchise agreement is the deposit stage. In this stage there is an agreement in principle subject to certain terms and conditions, and the completion of due diligence. Often the franchisee to be is expected to put down a deposit towards the franchise. Ensure you discuss this agreement with your lawyer before signing. The best franchise legal advice, experience, says not all of these deposits are refundable if the conditions are not met.
Why pay for a franchise agreement review?
Once the due diligence is completed and the deposit stage has passed, it is time for the buyer of a franchise to negotiate a franchise agreement. During this process it is important to have a team of professionals to ensure the provisions of the agreement protect your rights to the business you are investing in. Historically franchise agreements are heavily one sided in favour of the franchisor. The latter is almost always the larger wealthier party to the agreement. The following people will help to ensure a fair deal for a franchise buyer:
- Legal Council – A prospective buyer of a franchise business should absolutely never sign an agreement with a franchisor without having a lawyer review all of the provisions of the agreement.
- Accountant – An accountant will help a franchise buyer to determine the cash flow and value of the business. Does the investment make sense and will the returns be appropriate. The accountant should also do an analysis of the costs and ask the question; are the terms of this agreement reasonable? All costs and amounts from the accountant should be taken back to the legal council to ensure they are written into the agreement.
- References – Double check the costs stated by the franchisor, with others who already own the franchise. Ask them for their advice based on their own experiences with the franchisor. Are there items they were promised they did not get because they were not in the final agreement?
The agreement should also spell out clearly the rights and responsibilities of both sides. Good franchise legal advice is to ensure all promises from the franchisor that are stated during discussions end up in letters annexed to the agreement. This is key because in most cases the agreement will state that it constitutes the entire agreement, negating any legal obligation for verbal promises made by the franchisor. Some of the key areas the agreement needs to cover are:
- Royalties and Franchise Fees – Any fees whether one time or ongoing payable to the franchisor need to be written down in the text of the agreement. This will prevent the franchisor from unilaterally changing the rates of royalties before the end of the agreement.
- Advertising Fees – If the franchisor charges advertising fees separate from the royalties these should be spelled out either as a percentage the entrepreneur can live with or as a fixed amount.
- Capital Outlay – Should the franchise require the franchisee to purchase land and build a building to the franchisors specifications what is the maximum cost the franchisee must bear. What party is responsible for capital overruns, since the franchisor usually manages the construction and renovation?
- Terms of Early Termination – Under what circumstances can each party terminate the agreement? In the case the agreement is terminated what amount if any is payable to the franchisee by the franchisor for the early termination. It is important this amount cover the unvested capital costs that the franchisee invested into the business.
- Renewal – Does the agreement renew automatically. If there are changes to the terms and conditions how are they set and negotiated.
- Sale – What requirements must the franchisee meet in order to sell the franchise forward? Beyond the usual approvals are there any specific provisions for a franchisor buy back. If the franchisor can buy the business is it based on matching a competing offer, fair market value, or a pre determined rate in the agreement.