A franchise is essentially where an owner of a business (the Franchisor) grants permission to a third party (the Franchisee) to use the Franchisor's business model and to trade under the Franchisor's brand, typically in return for payment of an initial start-up fee and ongoing royalty and management fees.
A franchise agreement is a legally binding contract that governs the relationship between the Franchisor and the Franchisee.
It typically sets out the scope of the Franchisee's rights to use the Franchisor's business name and brand and the extent of the Franchisee's obligations in relation to the franchise business's daily operations.
Generally, they are drafted heavily in favour of the Franchisor, as the Franchisor will rightly look to protect the reputation of its brand and business.
Although well-established Franchisors often adopt a "take it or leave it" approach in relation to attempts to negotiate the agreement, it is still imperative that prospective Franchisees conduct a full and extensive review of the agreement, to ensure they fully understand their key responsibilities, obligations and liabilities.
In this blog, our Hospitality and Leisure and Retail lawyers explore some of the advantages of the business model and key clauses to consider when reviewing a franchise agreement.
Advantages for Franchisees:
- Reduced risk – Joining a franchise can be considered a safer and more reliable way of starting a business rather than setting up from scratch.
- Established brand and customer base – Establishing a new brand can take many years and significant effort and expense, but with a franchise, customers already know the brand, and an advantage can be taken from the advertising and brand awareness already developed by the franchisor.
- Training and support - In many cases, the Franchisor will have an established training system in place to help Franchisees launch their businesses. In addition, the Franchisee is likely to become part of a larger network, thereby gaining access to successful marketing and operating strategies and also being able to work with other Franchisees to share ideas and best practices.
Advantages for Franchisors:
- Growing a business – franchising can be an efficient way of growing a business and accessing new territories without significant expenditure.
- Steady cash flow – initial ‘start-up’ fees as well as ongoing royalty payments can produce a steady stream of income for Franchisors.
- Brand development – franchising can allow Franchisors to gain access to more markets and locations faster, thereby developing the brand into new locations
What are the key clauses of a franchise agreement?
Whilst franchise agreements can be very lengthy and detailed and can vary depending on the sector, the following are some of the key terms which the agreement should cover:
Term/Renewal
It is important that the agreement clearly sets the duration of the contract. Generally, franchise agreements start with an initial term (often 5 years) and offer the Franchisee the opportunity to request a renewal term (subject to satisfying certain criteria).
Territory and Exclusivity
The agreement should expressly set out the geographical area within which the Franchisee may operate the business and confirm whether the Franchisee has the exclusive rights to operate within that area.
Franchisee and Franchisor Obligations
The agreement should outline all of the specific obligations that the Franchisee is expected to adhere to, such as compliance with any performance levels, ordering from specific suppliers, maintenance of certain equipment and any other responsibilities that are critical to the operation of the franchised business. It should also set out any obligations that the Franchisor is to comply with such as providing regular training and support services to the Franchisee.
Fees and Payments
The agreement should set out the details of the initial fee (if any), as well as any ongoing management fees and royalty fees payable by the Franchisee.
Intellectual Property Rights
The agreement should grant the Franchisee adequate rights to use the Franchisor’s intellectual property rights in the course running the franchise business. In addition, the Franchisee’s should ensure that the intellectual property rights are adequately protected (such as registered trademarks) and that the operational know-how is made available in a comprehensive operation manual.
Selling the Franchise Business
The agreement should include a right for the Franchisee to sell the franchise business. Often, the Franchisor will include a right of first refusal to acquire the franchise business itself. If it chooses not to exercise such right, it will usually include a list of conditions which the incoming franchisee must satisfy – to allow the Franchisor to maintain control over the suitability of the incoming franchisee.
Termination and Consequences
The agreement should clearly outline the termination rights of both parties. Generally, the Franchisee will have fewer grounds (if any) than the Franchisor to terminate the agreement prior to the expiry of the initial term – this is mainly because most of the obligations under the agreement fall upon the Franchisee. The agreement should also outline the consequences of termination, which may include the return of confidential information, de-branding and the removal of any sign or reference to the franchise.
Contact Our Hospitality and Leisure and Commercial Lawyers
If you have any questions or would like more information in relation to franchise agreements, please get in touch with our Hospitality and Leisure and Commercial Lawyers, who would be happy to assist.
0161 941 4000
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