There are many factors to take into account when considering investing in a franchise business. One of the most significant elements is to carefully consider the implications of the Franchise Agreement you will be asked to sign by your chosen Franchisor company. If the Franchisor is a member of the British Franchise Association (“BFA”), you will have the comfort of knowing that the Franchise Agreement has been vetted as part of the Association’s membership accreditation process. This means the Agreement will have been reviewed to ensure it complies with the BFA’s Code of Ethics of Franchising. The Code sets out standards of ethical business conduct for franchisor members, and specific requirements for the Franchise Agreement itself.

In virtually all Franchise Agreements the Franchisee will be required to pay the Franchisor an initial fee. You should ask what is included in the initial fee and whether there are additional set up costs such as training or the purchase of products, equipment or the acquisition of premises that are payable in addition to the initial fee.

The Agreement will also include obligations to pay an ongoing fee, often called the “Management Service Fee” or “Royalty” which can be payable weekly, monthly, or sometimes quarterly. Typically, the ongoing fee is calculated as a percentage of the gross sales of your franchise business. Occasionally the ongoing fee will be a fixed monthly or weekly sum or calculated as the higher of a minimum fixed amount or a percentage of gross sales.

The Agreement should explain what support you will receive from the Franchisor to support your new business. This may include advice and assistance on the location, fitting out and design, and putting together a marketing program to launch your new franchise business .

The Agreement should also set out what ongoing support you will receive. This may include the provision of further training, conferences, technical support, and the procurement of supplies of products or equipment necessary for the franchise and guidance about where they can be obtained at the best price.

A key difference between setting up business on your own and buying a franchise as part of a network is that as a franchisee you are licensed to use a tried and tested methodology for operating the business, often referred to as the Franchisor’s System.

You will be contractually required to comply with the Franchisor’s “System” as set out in both the Agreement and the Franchisor’s Operations Manual . An advantage of trading as a franchise is that the brand under which you operate should be properly protected as a registered trademark to prevent third parties copying or using the brand without permission.

Any well drafted franchise agreement will prohibit your involvement in a similar or competing business both during the time you are a franchisee and for a period of time after the end of the Agreement.

Most franchise agreements require the Franchisee to be bound for an initial fixed term. Five years is common, but the term of the Agreement can be a long as twenty. As a franchisee you must ensure that the initial term provides sufficient time for you to make a return on your investment. Most agreements do not permit the Franchisee to end them early by giving notice. Unlike an employment contract a Franchise Agreement does not allow the Franchisee to give notice and leave the business prior to the end of the initial term.

At the end of the initial term, as the Franchisee you should have a right to renew the term of the licence. Typically the right to renew will require the franchisee to satisfy various conditions to qualify to renew the licence.

Once the Agreement comes to an end, because the initial term has expired and the licence is not renewed or because the Franchisor has exercised its right to terminate as a result of a serious breach of the Agreement by the Franchisee the right to trade as a franchisee will also end. You will be required to stop trading, cease using the Franchisor’s trademarks and trade names, and the Franchisor may exercise its right to step in and take over the business.

A well drafted Agreement will prohibit you from carrying on a competing or similar business within your territory after termination. It will also prohibit you from doing business with customers and from taking on employees who worked in your business or from other franchisees in your network or the Franchisor.

Franchise Agreements are usually lengthy documents written in technical legal language weighted in favour of the Franchisor. All prospective franchisees are recommended to take advice from an experienced franchise solicitor before signing who will be able to explain the key obligations and implications of the proposed Franchise Agreement. The BFA have a list of solicitors who are experienced in advising prospective franchisees and will be able to provide you with the specialist advice you should take before investing in a Franchise business.

Jane Masih, Partner – Franchising /Corporate and Commercial