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Franchise Advice


Jane Masih Director jane.masih@ owenwhite.com


“The benefit of taking


independent legal advice is that you have a clear understanding of what you are required to do”


A


fter months of researching you have finally made a decision about which franchise opportunity you wish to


invest in. The franchisor’s franchise director has recommended that you seek legal advice on the terms of the franchise agreement you will be required to sign. Understandably, you are concerned about what this will involve, and why, given that you have made a decision about the franchise you wish to acquire, the franchisor recommends that you should take legal advice. The answer is very simple: independent legal advice ensures that you obtain an explanation of the nature of the legal commitments you will be bound by both during and after the term of the franchise agreement. By taking advice from an experienced franchise


lawyer you will receive the benefit of their knowledge of what constitutes a fair and reasonable franchise agreement and if it conforms to the ethical franchise practices in place. Franchise agreements differ from many other commercial agreements, and to the inexperienced reviewer can appear to be very one-sided in terms of the obligations and restrictions. In acquiring a franchise you are being granted a licence to use the franchisor’s business system, including the brand name and other intellectual property. These are valuable assets and the franchise agreement gives the franchisor the ability to control the manner in which the franchise owner can use those assets.


It is unusual for a franchisor with a tried-and- tested franchise business system to agree to substantial changes to the terms of its franchise agreement. In some cases there may be particular


reasons why certain matters need to be dealt with by way of a side letter, but any franchisor that is open to wholesale redrafting of the franchise agreement in order to persuade a prospective franchisee to sign is a company to be concerned about. The franchise agreement will set out provisions detailing the way in which you are required to operate your business as a franchise within the franchisor’s network. There will be detailed obligations relating to the payment of fees, control of standards and restrictions preventing you from setting up a business in competition with the franchisor’s system.


The agreement should also contain provisions about how you can sell your business and how the agreement can be renewed at the end of the initial term, as well as what happens in the event you are unable to operate the business through ill health and what provisions will apply if you die during the term of the agreement. If you breach your contractual obligations as a


franchisee, the agreement will give the franchisor the right to terminate. If the franchisor takes this step, your right to operate your business will come to an end. It is very important to understand what actions will allow the franchisor to terminate the agreement, as the financial consequences of this happening will be substantial. If, as is highly likely, the agreement is intended to operate for a fixed term, the franchisor may have the right to claim from you the profits it would have received if you had operated the business to the end of this contracted period. The majority of franchise agreements contain


provisions restricting your ability to continue trading as a competing business after termination. Depending on the scope of the restrictions, the court


will support a franchisor enforcing a restriction that protects its legitimate business interests and that of its network of franchisees. It will be unusual for a franchise agreement to give


you a contractual right to give notice and bring the agreement to an end at your discretion. A franchise agreement is not like an employment contract and you should not assume that you will be able to bring the agreement to an end if the business is not as you had anticipated. Acquiring a franchise is a very serious commitment and requires a lot of careful consideration before signing your signature on the dotted line.


The benefit of taking independent legal advice


is that you have a clear understanding of what you are required to do and, more importantly, what you cannot do before you commit to buying the franchise. Taking advice gives you the opportunity to ensure


that any promises that have been made to you by the franchisor are reflected in the terms of the agreement, and that you understand the nature of the legal obligations and restrictions that will apply to your relationship with the franchisor. The agreement is the key to understanding the nature of this commercial relationship.


Instructing a solicitor who is affiliated with the British Franchise Association to provide a report provides reassurance that you are being advised by someone who has experience of reviewing franchise agreements. It also ensures the solicitor is able to provide you with an opinion about whether the proposed agreement is good, bad or one to be wary off! n


Jane Masih is a director at Owen White Solicitors and heads the franchise team.


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