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The Franchise AgreementInvesting in any new business involves risk. One of the advantages of franchising is the prospect of establishing a new venture based on the franchisor's tried and tested business model with ongoing support, which would not be available if starting a completely new venture. Of course, this alone does not guarantee success and it is important for franchisees to thoroughly investigate the franchise opportunity before committing resources in terms of finance, time and effort.
Are you, the franchisees, getting what has been promised?
The decision to become a franchisee is influenced by the information provided by the franchisor about its business prospects, as well as the extent of the franchisee's enquiries. It is also likely that talks with the franchisor will not involve any detailed consideration of the terms of the franchise agreement. Although many franchisors will aim to recruit franchisees with the ability to make the business a success, don't forget that they will also try to make a sale. The franchisee must distinguish between sales 'puff' and reliable representations. It is the franchise agreement which governs the relationship between the parties.
It is therefore important to make sure that any promises or representations made by the franchisor are confirmed in the agreement. For example:
If an exclusive territory is granted, are there situations in which the territory can be reduced or exclusivity withdrawn?
What initial launch support will be provided by the franchisor?
What restrictions are there on renewal of the agreement after the expiry of any initial term?
What training and administrative support does the franchisor provide?
Does the franchisor have to supply products and services on competitive terms?
Does the franchisee have the right to sell the business?
Are there any restraints on the franchisee pursuing other business interests?
What fees are payable? Are there situations where these can be increased?
Are there any hidden fees and costs?
Why should you take advice on the franchise agreement?
It is probable that a franchisor will advise that the terms of the franchise agreement are standardised and it is unwilling to make any amendments to it. But it is not unusual for franchisors to agree minor amendments by way of a side letter or supplemental agreement.
Even if the franchisor won't change the agreement, any commercial assessment with regard to the prospects of the business and the viability of the franchisee's business plan will require an assessment of the agreement. The franchisee must be satisfied that there are reasonable prospects for obtaining a return on the investment in the business over the term. A report on the agreement allows the franchisee to clarify or query certain points which might prevent the decision to proceed, such as:
Restrictions on the franchisee in sourcing products.
Requirements for the franchisee to invest in goods and equipment.
Unusually harsh termination provisions.
Conditions on renewal.
Why speak to a British Franchise Association-affiliated lawyer?
Franchise agreements are specialised commercial agreements which commonly contain a range of provisions peculiar to franchising. A well-drafted agreement will be a comprehensive document and should comply with the BFA's code of ethics. An experienced, specialist franchise lawyer will be familiar with the structure of the agreement and be able to explain its nature in the context of the franchise industry and will also be able to identify any peculiarities.
Although franchise agreements tend to be weighted in favour of the franchisor, some individual terms are still negotiable. An experienced franchise lawyer is likely to be better placed to identify negotiable issues, highlight any potential pitfalls and help the franchisee to make an informed decision about whether or not they should proceed.
Mike Barlow is a partner with Leathes Prior solicitors, a commercial law firm and a British Franchise Association affiliate member with a nationally acknowledged expertise in franchising and intellectual property law. Mike can be contacted on 01603 281152 or firstname.lastname@example.org