Understanding different franchise agreements

Kevin Smith reveals how to understand the different agreements in franchising

Franchisors sometimes require prospective franchisees to sign one or more agreements before signing the franchise agreement itself. Also, the franchise agreement may take different forms depending on how the franchisee intends to run their business.

Initial documents
Prospective franchisees may have to sign one or more of the following: a deposit agreement, a confidentiality agreement, or an ‘intent to proceed' agreement (also known as a franchise purchase agreement). Occasionally, some of these agreements may be combined into one document.

Deposit agreement
Prospective franchisees may be required to pay a deposit to the franchisor and sign a deposit agreement setting out the terms on which that deposit is paid and held by the franchisor.Deposit agreements should provide that the deposit will be credited to any initial franchise fee and for the deposit to be refunded if matters do not proceed.

Deposit agreements should provide that the deposit will be credited to any initial franchise fee and for the deposit to be refunded if matters do not proceed.

The British Franchise Association's Code of Ethics says that written details of any deposit must be given to prospective franchisees including details of what costs may be deducted by the franchisor and under what circumstances. The code also says that deposits must be refunded to prospective franchisees who do not become franchisees, or offset against the costs of joining the network for those that do.

Prospective franchisees must know the basis on which refunds will be made and should consider taking advice if the document does not entitle them to a refund, for example.

Confidentiality agreement
Franchisors will provide valuable commercial information about their business to prospective franchisees, but will need to protect and prevent their business falling into the hands of competitors.

Prospective franchisees should be aware that they may be required to keep the franchisor's information confidential indefinitely, depending on the terms of the agreement, which should also set out the circumstances where confidential information may be disclosed, for example if required by a court order.

Intent to proceed agreement
Such agreements are usually required where premises are needed to operate the franchise, but have not yet been located. Franchisors may spend time and money locating premises for prospective franchisees and therefore require a contractual commitment from them, before they are in a position to sign the franchise agreement itself.

The franchise agreement
The franchise agreement may take different forms depending on whether the prospective franchisee is an individual, trading as a limited company or in partnership. In all cases though, the main provisions of the agreement will be broadly the same. Prospective franchisees should always seek legal advice before signing the franchise agreement.

Prospective franchisees sometimes set up limited companies to run their franchise business to try and limit their liability, for example. If so, the franchisee will be the limited company and the parties to the franchise agreement will be that company and the franchisor. Individual shareholders in the company will usually have to sign a personal guarantee in favour of the franchisor making them personally responsible for the company's liabilities to the franchisor if it fails to perform.Where two or more individuals acquire a franchise together, they will do so in partnership with each other. If so, the parties to the franchise agreement will be the franchisor and all of the individual partners, who will be responsible individually and collectively for the partnership's liabilities. In these circumstances, the prospective franchisees should consider having a written partnership agreement between them dealing with how profits, losses and any liabilities of the business will be shared.

Where two or more individuals acquire a franchise together, they will do so in partnership with each other. If so, the parties to the franchise agreement will be the franchisor and all of the individual partners, who will be responsible individually and collectively for the partnership's liabilities. In these circumstances, the prospective franchisees should consider having a written partnership agreement between them dealing with how profits, losses and any liabilities of the business will be shared. 

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