Fundamentals of franchising: What to look out for in the franchise agreement

The journey to becoming owner of a franchise is an exciting one. You have made the big decision to become your own boss and to run a franchise. You’ve done a lot of research and found your perfect business. The finance is place and now it’s time to sign on the dotted line with the franchisor.

What is a franchise agreement?

The franchise agreement is a legal, binding contract between a franchisor and franchisee. It outlines the obligations of both parties for the term of the agreement.

The franchisor will have a non-negotiable franchise agreement it requires all franchisees to sign. As the franchisee, it’s essential to understand the details before putting your signature to it, as two seasoned legal professionals explain here.

Catrina Newman QFP is practice manager at Goldstein Legal, a commercial law firm based in Windsor. She comments:

“The franchise agreement is fundamental to your franchise and it’s crucial you understand the terms you are committing to. This is a business agreement which is binding – you have no right to change your mind once you have signed it and cannot just get out of it.”

Nicola Broadhurst is commercial partner and head of franchising and retail at the Guildford-based commercial law firm Stevens & Bolton LLP. She says:

“One of the principles of ethical franchising is that all franchisees are on the same terms. There is a commercial justification for the agreement to be non-negotiable, but a specialist solicitor can help you understand the details and can support you in adding side-letters which address certain points, and which can be used as supporting evidence should a dispute ever arise.”

Here Catrina and Nicola outline some of the key things to look out for when reviewing your franchise agreement.

Incentives to sign up quickly

Brands in the early days of building their franchise networks might offer some more favourable terms to early adopters, and this can be justifiable. However, if a franchisor uses a commercial or any other incentive to put pressure on a franchisee to sign the agreement to a short deadline, this should give pause for thought.

Catrina comments:

“I’ve come across franchisees who have been given as few as two or three days to review and sign a franchise agreement in order to secure some kind of incentive.”

“The franchisor hurrying them through the process is a clear red flag – why is the franchisor putting this pressure on them? Are they trying to avoid the agreement being scrutinised?”

“Franchisees should be allowed to take the time they need to review the agreement in full and with the help of a specialist solicitor. This takes time. Ethical franchisors will understand this and allow for it in timescales.”

Long leases

Something else to look out for is the requirement to sign a long lease on the premises from which the franchise will operate.

Catrina comments:

“If you choose not to renew the franchise agreement at the end of the term, you could hit a financial problem if you are then stuck with the ongoing lease on a property after you cease to operate the business. So, it’s very important to ensure that you don’t sign a lease on a property which commits you for a long period with no break clauses.”

“It’s also important that the timing of the signing of the franchise agreement is in tandem with the signing of the lease. If you are signing a five-year franchise agreement and then, for example, six months later decide to rent office space and sign a lease for five years, you’ll potentially be stuck with the premises for six months beyond the end of the franchise.”

Reputation

While the franchise agreement sets out how the franchisor should support the franchisee and the franchise network, the reality can sometimes deviate from what’s in the contract.

Nicola says:

“As specialist solicitors, we have a lot of experience of a number of franchise brands. There are some who work to agreements which on paper tick the right boxes, but who we know have a history of issues.”

“The more advice you seek from industry professionals, and the more franchisees you speak with, the better informed you’ll be about how the franchisor operates in reality.”

Both Catrina and Nicola emphasise the importance of consulting with a number of franchisees of the brand you are committing to, before you sign anything.

Catrina says:

“Don’t just contact a select list given to you by the franchisor. Approach as many franchisees as you can – be proactive in seeking them out.”

“It’s unrealistic to expect glowing reports across the board. So, if and when you do encounter an example of a negative experience, ask the franchisee how the franchisor dealt with the issue. Was the franchisor available and willing to help resolve the situation? What did the solution look like and did it fix the issue?”

Goldstein Legal and Stevens & Bolton are affiliated members of the British Franchise Association (bfa). The bfa has been responsible for setting high quality standards for UK franchising since 1977. Both Nicola and Catrina recommend that you check if the franchise brand you are considering is a full member of the bfa.

Catrina says:

“Membership of the bfa offers assurance that the franchise has already been through a vetting process, and members are obliged to include certain terms in their franchise agreements, for example, the right to sell your franchise and at least one opportunity for renewal.”

Nicola comments:

“It’s worth finding out who has drawn up the franchise agreement for the franchisor. It’s a good sign if it’s been written by an affiliated member of the bfa, because they will be fully aware of the principles of ethical franchising.”

Protect yourself

Ultimately, the franchise agreement is more in favour of the franchisor and cannot cover every eventuality. You can, however, protect yourself in other ways, as Nicola explains:

“Nobody likes to dwell on the worst-case scenario, but franchisees need to think about what would happen should they become too ill to run their franchise, or if they pass away. They or their family could still be liable for fees and income due to the franchisor.”

“I think more attention needs to be given to insurance and I’d always advise franchisees to consider insurance policies covering death and incapacity, critical health, key man and gap value.”

Summary

Before signing the franchise agreement

• Understand what you are signing – consult with specialist solicitors to ensure you are clear and have documented clarification of certain clauses
• Check that the franchisor is a full member of the bfa. An added advantage is if the agreement has been prepared by a bfa affiliated member
• Contact as many franchisees as possible as part of your due diligence. They are best placed to give you a true picture of what it’s like to operate as a franchisee of the brand you have chosen
• Budget for insurance to cover worst-case scenarios

And remember that most franchises operate successfully!

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