Things to look out for in any franchise agreement
A franchise agreement is just like any other contract – it sets out the rights and obligations of each party to the contract and ensures that if either party fails in these obligations, there are sufficient remedies in law to rectify the breach. While not a particularly exciting read, a franchise agreement in setting out how your franchise will start, run and ultimately come to an end. A franchise agreement is legally binding, and can often be a lengthy legal document with many clauses and considerations. As a result, you should seek professional advice before entering into a franchise agreement and making such an investment in your future. However, even before you begin looking for a franchise opportunity, it can be helpful to understand some of the key things to look out for when entering into a relationship with a franchisor.
What is a franchise agreement?
A franchise agreement is the document which underpins the franchise relationship. It is a legal document which sets out clearly how the franchisor/franchisee relationship will operate. One of the biggest mistakes franchisees make is not fully understanding the terms of the franchise agreement, and breaching their obligations without malice. Even so, there can be significant complications.
Also, some franchisees make the mistake of signing the franchise agreement without too much interrogation – believing that the terms cannot be negotiated or amended to suit them better. Even where you are considering saving money on lawyers fees, in the long run utilising the understanding and experience of a franchise agreements expert can pay off in the long run.
Key things to look out for
Length of the agreement
When negotiating the length of the agreement, there are two things to consider.
Firstly, you will need to look at the fixed term, whereby the franchise agreement may come to an end. Typically, this will be five years but every contract is different and you can negotiate this term. You should be aware of any notice you may need to provide if you wish to renew the franchise agreement. Where you miss any deadline for renewal, the franchisor may assume you wish to terminate the agreement and they may make arrangements for another franchisee to take over in your territory when your term ends.
On the other hand, you also need to be aware that you will be bound to continue with the business for the fixed term – even where it is not working out for you. A franchise agreement is legally binding, and a fixed term means just that. It is very uncommon that a franchise agreement will include a clause that allows the franchisee to terminate the contract early. The only other options is for the contract to run its course, where the franchisee wishes to sell the business or where the franchisor terminates the agreement for breach of contract.
Sale of the business
A franchisee has the right to sell the business. However, any sale will be dependent on whether the franchisor approves of the new buyer. The franchisor has the final say in any franchise sale as it will be the responsibility of the new franchisee to conduct business in the name of the franchisors brand. The franchisor will have certain requirements and criteria to ensure that they can run the company as a whole effectively, and that all franchises are up to their brand standards.
Renewing the franchise agreement
Renewal of a franchise agreement is slightly misleading, as it is not an extension of the existing contract but a new agreement with different obligations and terms. Normally, there will be a notice period required to indicate to the franchisor that you wish to enter into a new franchise agreement to continue your business. In most cases, you will be permitted to enter into the new contract where you have satisfied your obligations under the original contract, and met any performance standards.
Territory can be an important part of how successful your business enterprise will be. The territory set out in the franchise agreement can dictate future profitability, so it is important to analyse the area carefully. The size of the territory might not be as important as the suitability for your business and whether you are granted exclusivity or not.
If you’re a franchisor and need help mapping territories, then tech4t can help.
Fees and charges
All fees should be set out clearly in the franchise agreement, and there should be nor hidden charges to pay after you have signed the document. Normally you will pay a franchise fee, royalty fees and a contribution to the marketing pot. However, where there are fees you are unsure of, you may wish to discuss these with your solicitor.
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