Why the franchise agreement is so important
Franchise agreements are often compared to prenups, they are only reviewed when you want to get divorced! However, the franchise agreement is possibly the most important document in the franchise system. If the relationship between franchisor and franchisee breaks down or a franchisee is not compliant, the agreement plays an important part to make sure both parties are protected. It should set out what is expected of both parties from the outset and, most importantly, define their future relationship and set out the terms that will bind them for the duration of the franchise contract.
What should your franchise agreement include?
While there are no set rules on what should be included, the franchise agreement defines the legal relationship between franchisor and franchisee, and it should look to achieve three essential objectives:
1) The “grant” and general terms – It should clearly set out what is being “granted” and licenced from the franchisor to the franchisee, as well as the operating terms that apply to the grant;
2) The brand/ Intellectual Property (IP) – It should protect both franchisor and franchisee, the franchisor’s brand, IP and know-how; and
3) The rules- It should cover the rules the parties are expected to follow in the operation of the franchised business.
The “Grant” and terms
There is no special law for franchising, and if difficulties should arise the franchise agreement will determine what rights and obligations have been set out.
Below sets out what is expected from the “grant” and are also some essential operating terms that should be covered:
- The rights granted to and the obligations of franchisee – the licence to operate the franchised business;
- The rights either retained or granted to and the obligations of the franchisor;
- The goods/services to be provided to the franchisee (if any);
- Payment terms by the franchisee;
- The overall duration of the agreement;
- The franchisee’s use of the franchisors brand identity including trade name, trademark, signs, logos etc.;
- The procedure to renew the agreement;
- The conditions of terminating the agreement and what is to happen when the franchising relationship ends;
- The terms for if and when the franchisee can sell the operating franchise business and the franchisor’s pre-emption rights;
- The franchisor’s right to change the operating manual (the “rules” – referred to below) and franchise system.
The brand/ IP
The franchise agreement must have provisions in place to protect the franchisor’s brand (including trade name, logo etc.) know-how, system, the manual and confidential information. The Intellectual property rights set out how the franchisee can use trade names, trademarks, and copyrights.
It is in the best interest of both the franchisor and franchisee to ensure that no third party or ex-franchisee infringes these intellectual property rights and does not allow for any external use of trademarks, trade names or copyrighted materials.
All franchisees should ideally be treated as a family so there should be no room for favourites. All prospective franchisees should be offered the same terms with no special deals.
A franchisee is, therefore, invariably invited by the franchisor to “take it or leave it”. If a franchise agreement is not negotiable then it is crucial, from the franchisee’s point of view, that it is not only sound from a legal point of view but also workable in terms of the rights and obligations.
The vast majority of the rules will ordinarily be captured under the operating manual – something that you will not have access to until you have entered into the franchise agreement due to it being so confidential – it is therefore critical that access is granted to existing franchisees so that any prospective franchisee has the ability to assess how the franchisor operates, how the rules are applied and to understand how the “family” works.
When it comes to entering into a franchise agreement, there are many legal considerations to be aware of, not just covering the above. The franchise agreement is a crucial document in the relationship, and you should completely be understood before signing it.
Author: Kiall Bagnell- Corporate & Commercial Partner- Sherrards Solicitors