The franchise agreement

The Franchise Agreement

A well-drafted franchise agreement is a useful marketing tool, ultimately reflecting well on you. Nicola Broadhurst, Partner, and Kevin P Smith, Solicitor, at Mundays LLP, reveal how to ensure your franchise agreement is well drafted and contains sufficient detail clearly setting out the parties’ rights and obligations

The franchise agreement is arguably the most important document in the franchising process. It is critical that the franchisor’s brand, reputation and know-how are protected and that the franchisor has a clear, contractual remedy against defaulting franchisees.

Main terms of a franchise agreement

Grant of rights: The agreement should state exactly what rights are being granted to the franchisee and if a territory is being allocated, whether this is exclusive or non-exclusive.

Term: The duration of the agreement must be long enough for the franchisee to recover his investment and make a profit – typically five and sometimes 10 years is given.

Franchisor’s obligations: Typically, these obligations extend to initial training and further training, ongoing support and advice for franchisees. The franchisor’s obligations in the agreement must be specific and extensive enough to warrant the fees payable under the agreement.  
Franchisee’s obligations: The agreement should include extensive obligations detailing the way in which the business should be run and include confidentiality obligations, accounting and reporting requirements, controls on staffing levels and behaviour, and insurance.

Right to sell: Franchisees should have a right to sell their business in order to realise a gain on their initial investment. The right to sell is usually subject to the franchisor’s prior consent and is generally conditional on the franchisee being in full compliance with their obligations, as well as approving the prospective purchaser, payment of the franchisor’s expenses and costs of training the purchaser. Usually a further commission is paid where the franchisor has introduced the purchaser. Most franchisors also include a right of first refusal allowing them to buy back the business on the same terms and price offered by the purchaser.

Termination: Most termination clauses in franchise agreements are one-sided, allowing only the franchisor to terminate for the franchisee’s breach.  It is usual to provide for a fairly comprehensive set of breaches to avoid argument by the franchisee. The justification for such one-sidedness is that a franchisee is committed for the full term not only guaranteeing the franchisor an income stream from franchise fees, but also protecting the trade secrets. If a franchisee had the right to terminate on notice at any time, he or she could benefit from all the training and know-how of the franchisor then simply terminate and set up in competition either immediately or after any restrictive covenants have expired. Franchisees do, however, have a common law right to terminate if the franchisor fundamentally breaches the franchise agreement.

Non-compete: In order to protect the franchisor’s business from competition from current and former franchisees, the agreement should include non-compete provisions to stop franchisees competing with the franchisor, its other franchisees, or from poaching employees or customers both during the term of the agreement and for a period of time afterwards. These restrictions require careful drafting to ensure they are reasonable.

Operations manual

The franchisor should have produced a detailed operations manual setting out how the franchised business is to be run on a day to day basis. The manual is incorporated into the agreement and has contractual force, so a franchisor may bring a claim against a franchisee if that franchisee has breached a provision of the manual. The manual should supplement but not override the agreement.

It is crucial that you get your Franchise Agreement right for both protecting your brand and reputation. With any new Franchise Agreement, ensure you consult a qualified solicitor.