Franchise for sale: the franchise agreement


At a glance

  • There are 897 franchise brands in the UK and 36,900 franchisees. 521,000 people are employed in franchising
  • The two biggest sectors in franchising are business and commercial services and property services. 
  • Nine out of 10 franchisees see their franchise survive its first year and emerge from it making profit
  • Meanwhile, many franchisors expect their business to grow in the following year
  • Turnover in the sector was £12.4bn in 2010.
  • 100% of franchisors provide training for their franchisees.
  • 86% of franchisors and franchisees say they are satisfied with each other
  • Most franchise sales leads are generated over the internet. PR, referrals, print advertising and direct mail account for the rest
  • A new franchise opensin the US every 17 minutes
Franchise for sale: the franchise agreement

A franchise agreement is a contract you have to sign when you buy a franchise for sale.

It sets out the period of the franchise; the obligations that franchisor and franchisee have to each other; and conditions that allow for the termination of the contract.

Ethics

Even though a franchise agreement is perfectly legal, it may not be ethical.

A franchise agreement will tend to be more readily accepted in many jurisdictions (particularly within the European Union) if it satisfies, among others, any code of ethics that may be applicable, such as, for example, the European Code of Ethics for Franchising.

A franchise agreement should achieve three fundamental objectives:

  • It should contractually bind the franchisor and franchisee, and accurately reflect the terms agreed upon.
  • It should seek to protect, for the benefit of both of the franchisor and the franchisee, the franchisor’s intellectual property.
  • It should clearly set out the rules that the parties are expected to observe.

The terms

In the absence of any specific legislation or regulation of franchising in any particular jurisdiction, the franchise agreement becomes important in determining the rights and obligations of the franchisor and of the franchisee, and the relationship between them.

In the absence of any specific legislation or regulation of franchising, the franchise agreement becomes important in determining the rights and obligations of the franchisor and franchisee, and the relationship between them

In this respect the franchise agreement can be said to constitute the ‘engine room’ of the whole transaction. If difficulties should arise between franchisor and franchisee, they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement. This is particularly the case in common law jurisdictions.

What then should one look for in a franchise agreement?

A franchisee will look for promises from a franchisor to:

  • train the franchisee and its staff;
  • supply goods and/or services;
  • be responsible for promoting the brand;
  • assist, where appropriate, the franchisee to locate and acquire premises, and have them fitted out and converted into a franchised outlet (similar considerations apply with regard to the acquisition of vehicles, fitting them out, equipping them, etc);
  • assist the franchisee to set up the business;
  • improve, enhance and develop the franchisor’s business system; and
  • provide ongoing support.

A franchisor will wish to:

  • monitor the performance of the franchisee;
  • protect itself and its franchisees from unfair competition;
  • protect its intellectual property;
  • and impose obligations and restrictions on the franchisee with regard to the use by the franchisee of its business system.

Intellectual property

Unless the franchise agreement contains sufficient safeguards to protect the franchisor’s intellectual property rights, the franchisor may find that it is unable to prevent infringement of its rights by a third party or an ex-franchisee.If the contract is weak on this point, franchisees should not consider that particular franchise to be a sound investment proposition. The franchisor will be limited in what it can do to prevent a copycat operation from being set up in direct unfair competition with a franchisee.

The rules

All franchisees should be treated as a family and, as such, there should be no room for favourites. Franchise agreements come in a standard form and best practice requires that all prospective franchisees are offered the same terms, with no special deals being done.

The franchise agreement should therefore clearly:

  • specify in detail the duties and obligations both of the franchisor and of the franchisee;
  • deal with the payment of franchise fees and the timing of those payments; and
  • state the grounds upon which the franchisor will seek to terminate the franchise agreement.

For the franchisor, the franchise agreement is an income producing asset that will ultimately have a place in its balance sheet. If the franchise contract is defective, it can potentially cost the franchisor its whole network.

Although it may be tempting for both franchisor and franchisee to rely on goodwill, ultimately it is only the contract that matters. Whatever the size or reputation of the franchisor, prospective franchisees should always expect a high-quality franchise agreement, to preclude any policy changes within the franchisor company that would adversely affect them.

A franchise agreement is a double-edged sword, and once it has been signed both parties are bound by it – so check it thoroughly.

About The Author

noImage
Manzoor Ishani 
Manzoor Ishani is a Senior Consultant Solicitor with Sherrards, which advises franchisors and franchisees in the UK and internationally. He is an ex-member of the Legal Committee of the British Franchise Association and co-author of ‘Franchising in the UK’, ‘Franchising in Europe’ and ‘Franchising in Canada’.

Related Franchises