103-105 legal DSAP 29/10/07 17:31 Page 2
>>> CONTINUED FROM PAGE 103
WHAT TO EXPECT FROM A FRANCHISE CONTRACT 7. Minimum performance clauses
1. Introduction
THE FRANCHISE
It is becoming increasingly common for franchise
The franchise contract should briefly describe the
AGREEMENT
agreements to contain minimum performance
concept, who owns the knowhow, trade mark and
The franchise agreement
targets. Care needs to be taken in their use, there
system. If the franchisor is a licensee of the
should do the following:
must be minimum targets not maximums and it is
concept or trade mark owner this should be stated preferable for a staggered approach to be taken so
to avoid any ambiguity. 1. Clearly set out that failure does not automatically lead to
2. The rights granted
the rights and
termination. The figures must be justifiable.
A franchise is always granted, never sold - ie. the
obligations of the
8. Sale of the Business
rights to use the trade mark, expertise, trade
franchisor and the
The franchise agreement should provide an exit
connections and all the other things that comprise
franchisee to avoid
route for the franchisee. Usually this is subject to
the franchise package are given only for a specific
misunderstandings
the franchisor’s consent, which should not be
period of time and subject to certain terms and unreasonably withheld. The conditions that are
conditions. On expiry of the agreement all rights
2. Protect the
applicable to the consent being given tend to
revert back to the franchisor. It must be clear
franchisor’s
relate to the eligibility of the prospective
whether the rights being given are exclusive, sole
intellectual
purchaser and reimbursement of the franchisor’s
or non-exclusive.
property, trade
costs on the sale.
secrets and
3. The term
reputation
9. Terminating the Relationship
The grant of the franchise is usually for a specific It is rare for a franchisee to have a contractual
term of years. As a general rule the length of the
3. Detail the rules
right to terminate, however, at common law a
initial term must be long enough to allow the
governing the
franchisee may terminate if the franchisor is in
franchisee to recover its capital investment and
operation of the
fundamental breach of the agreement. The
enjoy at least two years profit. In practice this is
franchised
termination clauses tend to be onerous and
usually five or 10 years.
business.
extensive, allowing a franchisor to terminate on
4. Renewal
notice on a number of events such as failure to
Most franchise agreements allow the franchisee
pay fees on time, to provide the accounting
the option to renew for at least one further term,
information required, insolvency and breach of
but this right tends to be conditional. Any
the confidentiality provisions.
renewal fees must be looked at carefully.
The agreement may also terminate where the
franchisee becomes incapacitated or dies. It is
5. Contractual obligations
important that the agreement provides a period of
The franchisor’s initial obligations should include
time within which the franchisee’s personal
an obligation to provide the operations manual,
representatives can nominate a beneficiary to take
one of the most essential parts of the franchise
over or arrange a sale of the business.
concept as it contains the day to day detail of the
business. The franchisor’s continuing obligations
Conclusion
should state what advice, support and
It is not sufficient for a franchisee to rely solely
consultation will be given and at what price. The
on the franchisor’s reputation without ensuring
franchisee’s obligations are usually far more
that the franchisor is tied down to specific
detailed and extend to almost every area of the
contractual obligations. The franchisee should
franchised business.
speak to as many existing franchisees as possible
The payment provisions should be
to establish whether there have been any
unambiguous. Ability for the franchisor to
problems. Many of the bfa affiliated lawyers
increase fees during the term of the agreement
offer fixed fee reviews of franchise agreements.
should be resisted unless they are clearly
These fees, when compared to the total
justifiable. The fees usually consist of a royalty
investment costs required for many of the
or continuing franchise fee, which tends to be
franchises concerned, are minimal and it is wise
calculated as a monthly percentage. Occasionally
to take advantage of this service to ensure there
fixed fees are charged rather than a percentage,
are no nasty surprises waiting further down
but these can penalise a franchisee when he is
the line.
not succeeding.
6. Advertising
The agreement usually restricts the way in which
the business can be advertised. This helps protect
the brand of the franchisor, which is one of its
FURTHER INFORMATION:
most valuable assets. In some contracts there is
Nicola specialises in franchising, advising both franchisors
an obligation on the franchisee to commit to a
and franchisees on all aspects of franchising from
minimum spend on advertising or to contribute
regularly to a central advertising fund, which is
inception through to establishment of a franchise
maintained by the franchisor to promote the
business. She also regularly advises on UK and EU
network. There must be sufficient accountability competition law issues.
on the franchisor, who should be obliged to use Find out more about Mundays’ services at:
these funds for advertising purposes only.
www.mundays.co.uk
For more franchise advice visit:
www.thefm.net
104 ©2007 The Franchise Magazine
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143 |
Page 144 |
Page 145 |
Page 146 |
Page 147 |
Page 148 |
Page 149 |
Page 150 |
Page 151 |
Page 152 |
Page 153 |
Page 154 |
Page 155 |
Page 156