Franchisee's guide to Franchise Agreements

What is a franchise agreement?

A franchise agreement is the key legally binding document between a franchisor and franchisee. It sets out the parties’ rights and obligations towards one another for the duration of the franchise term.

As a prospective franchisee, you are likely to be sent a copy of the franchise agreement once you have been through your application and vetting process with the franchisor. Once the franchisor is satisfied that they are happy to bring you into their franchise network, they will typically share the franchise agreement with you.

Should you obtain legal advice on the franchise agreement before signing?

We would always advise that a prospective franchisee obtains legal advice from an experienced franchise solicitor before you sign on the dotted line. Ideally choose a solicitor who is affiliated to the British Franchise Association, such as ourselves.

Some franchisors will insist that you take legal advice on the terms of the franchise agreement – however even if this is not a requirement we would strongly recommend that you seek legal advice to understand the content of the agreement.

For most people, entering into a franchise is one of the most significant legal commitments (other than buying a house) that they will ever make. It’s therefore very important that you understand what you are getting into.

Will the franchisor agree to you making any changes to the franchise agreement?

It’s unlikely that the franchisor will be willing to make many, if any, changes to the franchise agreement. Franchise agreements are usually in a standard form and issued on a “non negotiable” basis. This is primarily to ensure consistency across the franchise network.

However, most franchisors will agree to changes to certain elements which are bespoke to your circumstances. This is usually done by way of a “side letter”, which is a short document attached to the franchise agreement which will record any changes, rather than making amendments to the franchise agreement itself.

What is contained in a franchise agreement?

Most franchise agreements follow a similar format. They contain a raft of provisions relating to the operation of the franchise provisions, as well as your legal relationship with the franchisor. They are usually quite long documents.

Franchise agreements will vary depending on the sector the franchise business operates in, and the size of the franchisor. However key provisions of a standard franchise agreement include:

1. A description of the franchised business such as the goods and services to be provided.
2. A licence to use the intellectual property rights of the franchisor, pursuant to the terms of the agreement. This enables the franchise to trade under the trade name, trade mark and brand when running the franchise business
3. The fees a franchisee must pay – this includes the initial fee (usually payable on signing) and any other or ongoing fees, such as the management service fee (also called royalties), marketing fees, IT fees you will be liable for. You may also have other ongoing costs such as purchasing stationery or other equipment on an ongoing basis (sometimes from third party suppliers approved by the franchisor).
4. The geographical territory you are permitted to trade in (often defined by postcode), and also whether you have exclusivity over that territory (i.e. will other franchisees be allowed to trade in the same area?)
5. Training. Prospective franchisees will typically undergo training immediately after signing the franchise agreement, however there will also be ongoing training requirements throughout the term. You may also be required to attend conferences with other franchisees, and the franchisor, on an annual basis.
6. The initial term of the agreement, when the franchise agreement expires, and how you can seek a renewal of the term.
7. A requirement to prepare a business plan for each financial year.
8. Restrictive covenants to prevent you from being involved in a competing business during the term of your franchise and for a period after termination.
9. If the franchisee is expected to take on employees, there will be provisions relating to the training of those employees.
10. Provisions relating to quality control – these can range from “mystery shopper” provisions, to setting out minimum KPI targets that your franchised business must meet throughout the term.
11. Marketing provisions, both in terms of any minimum spend you must make on marketing and getting involved with any franchisor-led marketing initiatives.
12. Termination provisions – i.e. how and when the agreement can be terminated. Franchisees rarely have a contractual right to terminate a franchise agreement unless the franchisor is in breach. Termination events are generally wide-ranging and franchisors can usually terminate the agreement on the basis of any number of breaches of the franchise agreement.
13. Personal guarantees. If the franchisee’s business will be run by a limited company, the franchisor will usually want to include the business owners as parties to the franchise agreement (also referred to as “principals”). The purpose of this is to ensure that if the franchisee company breaches the terms of the franchise agreement, the franchisor can pursue the principals directly as they will have personal liability for the franchisee’s compliance with the agreement.

Are there any other documents you need to review?

The franchise agreement is a key document setting out the legal terms of the relationship between the franchisor and franchisee. However, another key document is the operations manual.

The operations manual is generally viewed as the “bible” of the franchise business. All franchises will have a manual, and it will set out how franchisees must operate the business. This has two key benefits:

1. New franchisees will have the benefit of a document telling them how to run their business. It will be a franchisee’s first port of call when they face a query in how to run the franchise business
2. From the franchisor’s perspective, by telling franchisees how to operate the franchise business, they will have better management of quality control across the network, and therefore be able to protect their brand and reputation. This in turn benefits the network of franchisees which have all bought into the franchise business.

A prospective franchisee is unlikely to receive a copy of the manual until after they have signed the franchise agreement, however you may be permitted sight of the agreement at the franchisor’s premises.

Should you read the franchise agreement or just leave it to your solicitor to review?

It’s important that you have read the franchise agreement carefully yourself.

It may be that the franchisor has agreed to make a concession for you and, if your solicitor is not aware of this, he or she may not spot that it is not in the agreement when they review it.

Why Darwin Gray for Franchise Law?

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