The dotted line

When buying a franchise, the franchise agreement is the most important legal document you will sign, so be sure you understand what it's about

 

The agreement: what the experts say
Arguably the most significant aspect of a franchise agreement relates to the financial arrangements: the initial fee and the overall establishment costs payable at the outset, the continuing fee usually payable monthly, a marketing fund contribution if applicable and payments relating to the supply of merchandise or other materials.

However these issues should not be viewed in isolation, but taken into consideration together with the many other elements relating to the setting up, operation and accounting procedures of the business.

Overall, the franchise agreement serves to avoid any doubt as to the obligations of both parties, franchisor and franchisee, and can be expected to cover a great deal of relevant detail ranging from the term (usually five years but sometimes longer) to the termination arrangements.

Conditions for renewal for a further term or terms will be stipulated as will the procedure concerning the franchisee's sale of the business. At first sight, franchise agreements might appear somewhat daunting because they usually run to many pages, but nowadays they tend to be written in plain English and are not difficult to comprehend. However, my view is that prospective franchisees will do well to take advice from a bfa-affiliated lawyer before signing up so they fully understand the contract before signing on the dotted line.
Peter Williams, Consultant

The most important clause in any franchise agreement is that which grants the right and licence to the franchisee to use the franchisor's brand and business system. This clause (which is usually one of the first in the agreement) should identify not only the precise scope of such rights, but also the degree of exclusivity granted to the franchisee to operate the business from particular premises or within a designated territory.

The clause should identify which registered trademarks, trading name and other intellectual property rights, (such as proprietary software or any patented process) the franchisee will be authorised to use and for how long.
All other provisions in the agreement are effectively subsidiary to this grant of rights. The obligations of the franchisee are aimed at ensuring the accurate replication by it of the franchisor's proven business system and the support services to be provided by the franchisor are designed to assist the franchisee and ensure its success.

Without the grant of the licence, however, there is no franchise, so all prospective franchisees should check carefully that they understand the precise scope of this clause in the agreement before they sign it. Conversely franchisors should ensure their agreements accurately reflect the rights they are prepared to grant and provide the degree of exclusivity that is consistent with the business operation.
Jonathan Chadd, Solicitor, Leathes Prior

A franchise agreement should achieve three fundamental objectives:
1. Set out clearly what the franchisor has promised.
2. Seek to protect the franchisor's know-how and brand.
3. Clearly set out the rules that both parties are expected to observe.