The franchise agreement is the main document governing the relationship between you and your franchisor.
Therefore, it is very important to carry out detailed negotiations about each provision of the franchise agreement prior to signing. To help you have a better understanding of what a franchise agreement entails, we’ve listed the most important provisions to consider before signing (please keep in mind that this list is not exhaustive and we advise that you obtain legal advice before entering into the agreement).
1. Subject matter – as detailed as possible
This section of the franchise agreement is very important. It includes provisions on the running of the franchise and can take up quite a few pages, depending on the industry. This section can be called “Franchise Manual”. It should also include intellectual property provisions, such as those on the validity and protection of various IP rights attached to the franchise and all the licenses assigned to the franchisee, amongst others.
2. Rights and obligations
The agreement should clearly outline rights and obligations of both parties. The franchisee, for example, would want a detailed outline of their rights in relation to IP. Regarding obligations, they must be clear and concise. Make sure you understand, from the wording, what exactly you would be obliged to do, and what rights are granted to you by virtue of the franchise agreement.
An exclusivity clause makes it clear whether you have an exclusive right to the franchise or a non-exclusive one. An exclusive right would be better for you as a franchisee because it would make it easier to get off the ground and you’d have less competition to worry about. This is because such clause would let you have your own territory to market your goods or services. The territory should be established in the subject matter section.
Confidential information is an important asset for any business today. For that reason, franchisors would insist on imposing restrictions in the franchise agreement on the usage of confidential information by the franchisee. They might also want a non-compete clause. This is a clause that prevents you running a business similar to the franchise for a few years after the termination of the agreement. In turn, you should consider imposing restrictions on them, for example in relation to your liability. Under English law, you’d be protected by the veil of incorporation if you’re running a company, but it is nonetheless worth mentioning in the agreement that you as a physical person won’t be jointly and severally liable. We’ll talk more about liability below.
5. Payment terms
A franchise agreement needs to set out the conditions of payment. These include the initial sum to be paid to the franchisor and the conditions involved, as well as the schedule and size of installments. Often, franchisors would also insist on a personal guarantee that a franchisee can pay. Payment methods should also be included.
6. Training and support
As a franchisee, it is important for you to receive training and support when you start your business, as well as on an ongoing basis. The franchise agreement should include details about them, such as types and features of training and support offered, duration and schedule, and any associated costs and expenses.
7. Marketing and advertising
Many franchisors include marketing and promotion training and materials in the package offered to franchisees. It is, nonetheless, important to outline clearly in the franchise agreement the parties’ obligations in relation to marketing and advertising. This would include financial considerations, and a lot of conditions would depend on whether the agreement has an exclusivity clause. Keep in mind that a franchisor would often want to include certain advertising guidelines in order to preserve their goodwill.
8. Date and duration
Make sure that the duration of your franchising agreement gives you enough time to get off the ground and reap the benefits. You can include an automatic renewal term, or alternatively outline the actions to be taken in the event of renewal. In any case, make sure that you also include a termination notice period. The commencement date should also be clear from the agreement.
We’ve mentioned a non-compete clause earlier. It is one of the consequences of termination that can be included in a franchising agreement. There should also be provisions about what happens in the event of franchisor deciding to sell or you deciding to back out before the term ends. Circumstances for termination need to be clear and absolute, e.g. details about what constitutes a material breach by either party. Force majeure clauses are also a good idea.
You ought to consider including a provision about exclusion of your liability and/or your employees’ for certain events. Dispute resolutions clauses are also something to consider.
So you now have a broad overview of what to consider before signing on the dotted line, but which is the right franchise for you? You can search Reed Commercial for your ideal franchise by budget, location, industry sector and by lifestyle. So an example search is £10,000 to invest in a franchise in London, in the Marketing industry that can be run from home.Tags: franchise, rights, signing franchise agreement, support, training