How A Franchise Agreement Can Reduce The Risk Of Disputes

Reaching a level of success that allows you to contemplate franchising your business is an incredible achievement and one of which you should be proud. It is naturally rather nerve-racking to allow someone (who may be a complete stranger) to operate a business under the brand and reputation you have spent years creating. To ensure your interests are protected and mitigate the risk of costly, stressful franchise disputes, it is crucial to get the franchise agreement right from the outset.

What is a franchise agreement?

As a franchisor, you own the rights to your brand, business model, or system. Your business model’s success will have already been proven, and by launching a franchise, you can provide others (known as franchisees) with the opportunity to operate under your established brand. This will, in turn, grow your enterprise.

A franchise agreement is a legally binding contract that establishes the relationship between a franchisor and a franchisee. It sets out the rights and responsibilities of both parties.

What are both parties’ goals in a franchise?

One of the most effective ways to avoid contractual disputes of any kind is to understand the goals and objectives of the other party.

Objectives of the franchisor

• Payment of fees– it is not in the best interests of the franchisor to squeeze every penny of profit out of the franchisee as this is likely to demotivate the latter. Instead, the franchisor will normally charge an upfront fee to take on the franchise, and afterwards a continuing monthly or quarterly fee, usually based on a percentage of the franchisee’s turnover. Fees may also be charged for national advertising campaigns and training.
• Brand protection – Think of the last few times you have visited a McDonalds or Burger King. Chances are you received the same level of service and food quality each time. This is because the workings of a franchise business stem from an operating manual. So that the brand continues to enjoy a positive reputation, the franchisor will want to ensure the franchisee follows the operating manual to the letter.
• Protection of confidential information – if the franchisee decides to quit the franchise, the franchisor will want to ensure the franchise agreement prevents the former franchisee from using the franchisor’s business model and trade secrets to directly compete in the same market.

Objectives of the franchisee

• To succeed – the franchisee will want to know that they are investing in a successful business and that none of the claims made by the franchisor regarding the potential of the franchise operation’s success and prosperity have been misrepresented.
• Support – The advantage of purchasing a franchise instead of launching a new startup is that part of the deal includes the franchisor providing adequate support in terms of advertising, marketing, and training.

What should a franchise agreement contain to mitigate the risk of disputes?

Although every franchise is different, most franchise agreements should cover:

• The Parties – the agreement should clearly identify the franchisor and the franchisee, often detailing the legal status of the parties (e.g., corporation, partnership, person) and their principal place of business.
• Grant of Franchise – this section explains the rights granted to the franchisee. It confirms that the franchisee has the right to use the franchisor’s trademarks, service marks, logos, and other branding elements within a specific territory.
• Territorial Rights and Restrictions – the agreement must outline the geographic area in which the franchisee can operate. It may also detail any territorial exclusivity granted to the franchisee and circumstances under which the franchisor may or may not open additional franchises within that area.
• Duration and Renewal – the initial term of the franchise, which often ranges from five to twenty years. Additionally, the agreement should describe the conditions and processes for renewal upon the expiration of the initial term.
• Initial and Ongoing Fees -all financial obligations of the franchisee should be detailed. This includes the upfront franchise fee, ongoing royalties (usually a percentage of gross sales), advertising contributions, and any other applicable fees.
• Training and Support -the franchisor’s duty to provide initial training to the franchisee’s team and any ongoing training should be laid out, including details like training duration, content, location, and frequency.
• Operational Standards – to ensure brand consistency, franchisors will set comprehensive operational guidelines. This can range from store layout, signage, uniforms, and equipment to specifics on service delivery and product quality. Full details are usually contained in a separate operating manual.
• Advertising and Marketing – details of the advertising and marketing support provided by the franchisor and the franchisee’s obligations in terms of local advertising, contributions to national marketing funds, and any guidelines or restrictions on independent advertising efforts.
• Supply Chain and Approved Suppliers – the agreement may specify certain suppliers from whom the franchisee must purchase equipment, products, or services to ensure uniformity and quality.
• Intellectual Property – protecting the franchisor’s intellectual property is crucial. The agreement should detail the rights of the franchisee concerning the use of trademarks, service marks, and any other intellectual property, plus the steps to be taken in case of infringement.
• Default and Termination – the conditions under which either party can terminate the agreement, including the procedures to follow, notices required, and any grace period for rectifying breaches.
• Dispute Resolution – prescribed mechanisms to resolve disagreements, including alternative dispute resolution methods such as mediation.
• Assignment and Transfer – conditions under which the franchisee can sell or transfer the franchise to another party. This often requires the franchisor’s approval and may involve certain qualifications for potential buyers.
• Post-Termination Obligations – any obligations that persist after the agreement’s expiration or if it is terminated, such as the return of confidential materials or restrictive covenant/non-competition clauses, which restrict the franchisee from opening a similar business for a specified duration within a certain area.
• Miscellaneous Provisions – this includes various general provisions like governing law, enforceability, amendments to the agreement, and how notices should be delivered.

Although it may be tempting to download a franchise agreement online and/or save money by not obtaining legal advice, in terms of risk management, this is unwise. Not only will a Franchise Law Solicitor conduct extensive due diligence on the franchisor’s operation or the franchisee (depending on who their client is), they also have the knowledge and experience to swiftly spot factors that could lead to disagreements and ensure the contract is drafted/negotiated in a way that you, as their client, are protected.

How we can help

Our expert franchise law team has the knowledge and resources to draft a comprehensive franchise agreement bespoke to your business and market sector. And should a franchise dispute develop, we can advise and represent you to ensure the dispute is quickly resolved. In most cases, this can be achieved through alternative dispute resolution methods, meaning you do not have to endure the stress and strain associated with formal litigation.

To find out more about any matters discussed in this article, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only.  It is not, and should not be taken as, legal advice.  If you require any further information in relation to this article, please contact 43Legal.