Don’t fall at the final hurdle

Jane Masih of Owen White stresses the importance of being familiar with the legal implications of the franchise agreement.

“An overzealous or cavalier response to questions can prove very expensive in the long run”

Advising prospective franchisees to seek independent legal advice about the terms of the franchise agreement is widely recognised as good practice for franchisors. Many solicitors who are affiliate members of the British Franchise Association will carry out a franchise agreement review for prospective franchisees, often for a fixed fee.

Recruiting franchisees is time consuming, and a review of the franchise agreement is often one of the final stages before the prospect makes a binding legal commitment. Danger arises when franchisors have not thought about how to respond to the questions that a prospective franchisee may raise, having sought legal advice.

There may be members of the franchisor’s recruitment team who are not familiar with the legal implications of the franchise agreement. This, in turn, can create a stumbling block to ensuring that the prospective franchisee receives accurate answers to their questions. The result can delay putting the prospect’s mind at rest. It can also create grounds for misrepresentation if inaccurate information is provided that the prospective franchisee relies on when making their decision to sign the franchise agreement. For a prospective franchisee, the extent of exclusivity being offered can be a big factor in whether or not they decide to proceed with the opportunity. It is important to give an accurate response about whether the franchisee has territorial exclusivity, or if, in certain circumstances, the franchisor is retaining rights to provide the service itself or through other franchisees.

Another key area that can cause concern is what will happen at the time of renewal. It is likely that the agreement will provide for a renewal on the same terms: prospective franchisees may overlook the investment required in terms of additional training and refurbishment of premises and equipment, not that the terms of the agreement may change.

Many prospective franchisees assume that by trading through a limited liability company they are not liable personally. Franchisors must not give the impression that they do not hold the label under the guarantee if they are usually required to give as a contracting party to the agreement if the franchise business does not succeed.

It is very unlikely that the franchise agreement will enable the franchisee to simply bring the agreement to an end by giving notice to the franchisor. To give a prospective franchisee the impression that they could simply walk away or receive a refund of the initial investment if they are not happy can lead to disputes. Equally, assurances of minimum profits or promises about the time or investment required to open a unit can come back to haunt a franchisor.

Regarding figures representing financial performance, franchisors must make sure that the prospective franchisee knows whether the projections relate to the average performance of the franchise network, or the actual performance of a specific franchisee. It is often a good idea to give a prospective franchisee a range of figures reflecting the results of both a successful and a poorly performing franchisee, so that they can see the range of financial outcomes achieved in the network. Where information is given about fit-out costs, the prospective franchisee must be aware of the variables that need to be taken into account regarding the location of the franchise unit they have selected.

Recruiting franchisees who are honest and committed, but not legal or financial experts, an overzealous and cavalier response to questions or what seems like the final hurdle can prove very expensive in the long run if you don’t answer them clearly and accurately.