Have you been offered a franchise or do you need to renew or sell yours? If so, let our team assist you, with clear and swift legal advice. We offer comprehensive advice for fixed fees, which remain competitive and transparent.
We will take you through the terms of the agreement, advise you on your liabilities and obligations and assist with any issues that arise. You should always bear in mind that a franchise is a legally binding, long-term contract and so getting advice at this early stage might just be the best investment you make.
What are the key questions for a franchise arrangement?
- What are the legal stages of a usual franchise transaction?
- What is the franchise agreement likely to include?
- What if you want to sell the franchise on?
- What can go wrong?
- What else might you need to think about?
The Legal Stages
There are various stages that you will have to go through before you buy a franchise.
- Often you will be asked to sign a confidentiality agreement if confidential information, such as client data or inventions, are being provided/discussed;
- You will then enter into a deposit agreement, which will require a payment to the franchisor. This payment may be non-refundable;
- Your lawyer should then go through the franchise agreement itself to ensure you understand all its terms and your obligations;
- Take legal advice on a lease if applicable and sign/understand the appropriate landlord and tenant notices;
- Sign the franchise agreement and make the payment as required in the agreement;
- Make sure you have all your other documents in order: employment contracts, director’s service level agreements if applicable. See 'what else might you think about' for more information on what else may be required.
Standard Terms in a Franchise Agreement
As there is no specific legislation for franchising, the franchise agreement is the only means to set out and agree the parties' rights and obligations and the relationship between them. If any disputes arise at a later date this contract will be used to clarify and determine the intentions, rights and liabilities of the parties.
The Franchise Agreement should:
- Specifically bind the Franchisor and the Franchisee and accurately reflect the terms agreed.
- Protect both the Franchisor and the franchisee and applicable intellectual property.
- Establish and clarify the rules to be observed by all the parties.
As such a Franchisee will look for guarantees to:
- Train the Franchisee and its staff;
- Supply goods and/or services;
- Be responsible for advertising, marketing and promotions;
- Assist the Franchisee to locate and acquire property and have it fitted out and converted into a franchised outlet;
- Assist the Franchisee to set up the business;
- Develop the business;
- Maybe provide infrastructure such as accounting services.
Franchisors will be anxious to ensure that the franchise agreement clearly sets out the obligations of the Franchisee.
Selling your Franchise
The majority of franchise agreements will have a provision stating that where a franchisee wants to sell its business, the consent of the Franchisor is required, but that the Franchisor will not unreasonably withhold that consent.
As such questions we get often get asked are: what if the franchisor does not like the potential buyer or denies the sale for an unknown reason or disputes the price I am offering to sell it for? Can I still sell?
It may be that the Franchisor refuses consent to a sale where it believes it will lead to financial failure - perhaps because the price is too high or the Buyer has no previous experience or a poor credit history. This reasoning would seem fair and justified.
In order to refuse consent the Franchisor has to show that it has reasonable grounds for this decision. So simply not liking the buyer will be hard to establish as a genuine right to refuse consent, but an inflated price may prove understandable. The test is an objective one for a judge if an agreement is not reached.
So Franchisees should expect, upon sale, to:
- Train the buyer;
- Make a payment towards the Franchisor's costs and (sometimes) pay some sort of fee by way of franchise transfer fee;
- Obtain the consent of the Franchisor; and
- Rights of first refusal in favour of the Franchisor may sometimes apply (sometimes).
Franchisees need to secure, in order to obtain consent, in its buyer, the standards expected by the Franchisor. So we suggest applying the same criteria as the Franchisor applied to you, such as corporate history, ability, skill, financial acumen. Franchisors are careful in its selection of you as the initial Franchisee, so they will likewise be keen to be as selective in approving an incoming Franchisee.
Previous conduct is never a prefect guarantee as to future conduct, but it is an accepted practice that most prospective Franchisees rely on. The reputation of a Franchisor amongst its Franchisees will be considered. That said it is not in the Franchisor’s interest to be obstructive.
Can you terminate the franchise agreement?
Reasons a termination may be necessary include:
- Breach of the franchise agreement by the Franchisor .
- Breach of the franchise agreement by the Franchisee. Usually the agreement will provide for the Franchisee to be given the opportunity to remedy its breach before the Franchisor will terminate.
If at the end of a fixed term, the Franchisee, holds a right of renewal, they can choose not to exercise that right and/or the Franchisee may sell the business and the purchaser may be granted a new franchise agreement if that is permitted.
Upon termination the Franchisor will focus on protecting its commercial interests so that it can appoint a replacement Franchisee. Whilst the Franchisee will be concerned to recover as much as it can financially, and minimise the extent to which its future business activities will be restricted by the fact that he was a Franchisee.
The terms are often clear as to what must be done to terminate the agreement, but the parties should also pay heed to the post-termination provisions of a franchise contract. The Franchisor will always seek to protect its goodwill, client base and trade secrets so be careful to understand the full scope of those restraints as it may restrict your future trading.
Difficulties often arise regarding to the imposition of restraints on the future business activities of the Franchisee and the extent to which they may become competitive with the business of the Franchisor and his other Franchisees. As such these need to be considered seriously before entering into this arrangement as it could affect the franchise’s future trade.
What else might you think about?
Whether you are buying, selling or renewing your franchise you should also consider or address the following:
- We can assist with your director service level agreements or shareholders agreements;
- You may need employment contracts and our team are here to draft or advise upon these;
- If you are asked to provide any personal guarantees we have lawyers here that can give you independent legal advice;
- We can amend or draft your Will to include your new business or shares for tax efficiency and to ensure your loved ones and/or business is protected; and
- Should any debt collection or disputes arise our litigation solicitors are on hand to advise and assist you recovering these sums swiftly and efficiently.