Franchise advice
What a franchise agreement is... and isn't
It may not be a page-turner, but your franchise agreement is a super-important contract. John Pratt of Hamilton Pratt explains
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ranchisors are understandably keen to stress the close working relationship they will have with
their franchisees; in particular, the fact that they cannot have a successful franchisor business without successful franchisees. All of that is true, but there is also a contractual relationship between franchisors and their franchisees. This is very rarely stressed, because franchising is much more than a simple commercial contract. Nevertheless, this contract forms the basis of the relationship and so you should never proceed on the basis that the franchise agreement is not important – it is. Ultimately, it will govern what you and the franchisor can and cannot do. Franchise agreements are complex. They are usually 40 to 50 pages long, although some – thankfully not many – can be more than 120 pages in length. Reading a franchise agreement is not exactly an enjoyable experience, but it is essential that you try to understand its contents. If there is anything in the franchise agreement that you don’t understand or don’t like, then you should raise that with the franchisor or the franchise lawyer that you appoint to assist you in the review of the franchise agreement.
Protecting the brand Franchise agreements are, in many ways, one-sided commercial agreements (in favour of franchisors), because the franchisor is offering its know-how and its brand to a franchisee. It therefore does not want franchisees doing anything bad with either of them, plus the franchisor has a vested interest in ensuring that franchisees follow the franchisor’s system. This means that franchise agreements will not be ‘cosy’ and ‘cuddly’, as there are a lot of obligations and
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restrictions, but, equally, you need to know that the franchisor is able to maintain the brand and system standards you are paying for. While you may feel more comfortable with a ‘weak’ franchise agreement for yourself, you need to ask yourself whether you would be so comfortable if the franchisor issued a weak agreement to all franchisees. As a result, the franchisor could not enforce brand and system standards, which would inevitably lead to a reduction in the value of the franchise network and, in particular, your business. Another peculiarity of franchise agreements is that, generally, they should
"Both you and your franchisor need to know and understand what is in the franchise agreement"
not be negotiable. What a franchisor should say is something along the lines of: “We would love you to be our franchisee and this is the franchise agreement that you will have to sign – without any amendment or concessions.” The reason for this is that it is too time-consuming and expensive (if franchisors use lawyers) to produce amended franchise agreements for each franchisee. It would also be an administrative nightmare because the franchisees would be on different terms – you can imagine the challenge that would arise when a franchisee discovers that someone else had negotiated better terms than them!
Lawyering up Since franchise agreements are non- negotiable you may believe that there is little advantage in instructing lawyers, but that would be a mistake. Before you commit, you do need to know if there are any unusual, unfair or unworkable provisions in the franchise agreement – only experienced lawyers (preferably affiliated with the British Franchise Association) will know whether that is the case. Like buying a house, a surveyor’s report will not remedy what is wrong, but it will enable you to know what is wrong before you go any further. A franchise lawyer’s report on a franchise agreement performs exactly the same function.
Clarity is key The franchise agreement, even if long and complicated, should clearly set out each party’s obligations. While you can expect pages of obligations imposed upon you, much less-detailed ones are imposed upon the franchisor. Having said that, those obligations need to be sufficiently precise to enable you to enforce them. This means that vague obligations such as “provide advice and assistance as considered appropriate by the franchisor” are meaningless, because the franchisor could consider a 30-second chat on the telephone to be appropriate. This means that you need to look for specific obligations. You also need to ensure that the franchisor is not in a position to change important provisions – especially those relating to the fees you have to pay. You will need to know precisely what the financial aspects of the arrangement are.
Working together Finally, you may be surprised that the
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