Franchise Agreements

Identify the Parties

All franchise agreements should identify the franchisor and the franchisee. If the franchisee is a corporate body then the individual or individuals who own the corporate body will usually have to guarantee the franchisee’s performance and compliance with the agreement.

Duration and Renewal of the Franchise Agreement

Over time, and based on experience, many networks have gradually reduced the duration of their franchise agreements where, today, most franchise agreements have an initial term of 5 years with the franchisee having the right to renew their franchise for at least one more term, however, there are usually conditions attached to renewal and they should be carefully checked by the franchisee.  The most common conditions are, first, the franchisee must have substantially observed and performed its obligations and responsibilities set out in the original franchise agreement, and secondly, renewal is based upon the terms and conditions contained current franchise agreement being offered to franchisees at the date of renewal.

The duration of a franchise agreement should provide a reasonable period in which the franchisee can recover their initial investment and generate a good income. The initial investment often reflects the level of commitment (time – funds – performance criteria) that the franchisee is being asked to make to get the franchise up and running and so the term that the franchise agreement operates for could be;

• for a home-based franchise model 3 to 5 years
• for a retail business format franchise 5 to 7 years
• for an area development franchise 7 to 10 years
• for a master franchise arrangement 10 to 15 years

The British Franchise Association advises that in cases of five-year franchise agreements, the franchisee should be given the right to renew twice, making a total term of 15 years. There is usually a small renewal fee to pay to the franchisor.

Franchise Fees payable to the Franchisor

Any fees payable to the franchisor during the term of the franchise agreement must be identified. So must any conditions attached to any of the fees, such as the franchisor’s right to increase the fees at any time during the agreement, e.g. to take account of inflation.

Most franchise agreements will require the franchisee to pay a Start-up Package Fee. That fee covers the franchisor’s cost to provide a list of items and benefits needed to start the franchise business, such as training, ‘hands-on’ help during the first weeks of trading, launching the new business in the territory, etc. The amount of the package fee will vary depending on the complexity of the business model being franchised and the amount of support needed by the franchisee to get started.  

Franchisees will usually have to pay ongoing monthly fees which should be clearly stated in the franchise agreement. The 2 most common fees are (1) a management fee and (2) a marketing fee based on a percentage of sales or a fixed amount. 

All other ongoing charges the franchisee will be expected to pay to the franchisor must be listed and noted in the agreement. The franchise agreement definitions clause would usually include all fees with a description.

Some franchise agreements will not include fees because the franchisor may instead make money from the franchisee by selling equipment and supplies to the franchisee at a marked-up cost.

Another fee that a franchise agreement could contain is sell-on. It may be the case that a franchisee wants to sell their franchise before the end of their term and most agreements include a re-sale clause whereby the franchisor must approve the buyer and will charge a pre-determined fee for dealing with the re-sale.

Marketing & Promoting the Brand

The franchisor will usually take responsibility for marketing the brand to generate and increase awareness.

The franchisee will be responsible for promoting the brand in their territory. The franchisor will want to protect their brand's image by restricting the way the franchisee can use or apply the brand for promotional purposes.

This clause will also usually set out the level of responsibility the franchisee and franchisor have for the national and local marketing and promotional activity. Franchisees must study these two activities carefully.

Intellectual Property Rights

Intellectual Property Rights (IPRs) are also likely to be addressed by a franchise agreement. These IPRs are of significant value to the franchisor as they protect their brands:

• Trademarks
• Patents
• Copyrights
• Promotional materials
• Trade secrets
• Confidential information
• Domain names
• Database rights

Although a franchising model must be mutually beneficial for it to succeed, it is imperative that the franchisor monitors and protects the Intellectual Property associated with the franchise business. The franchisor has a general duty to all franchisees to ensure that its brand's reputation is not damaged. The franchise agreement and operating manual should establish clear rules that detail permitted uses of IP, and the agreement will set out the consequences of any violations.

Termination

A very important clause to be carefully read by every franchisee.

A robust franchise agreement will include provisions for the termination of the agreement. Termination can be started by the franchisor depending on specific circumstances set out in the franchise agreement. Usually, there will be a remedy for most breaches that can result in termination but not in every case which is why the clause must be read and understood.

Post Termination Restrictions

Another very important clause to understand is that if termination does arise then there will inevitably be some post-termination restrictions placed upon the franchisee and any individuals acting as guarantors.

Those restrictions are usually enforced rigorously by the franchisor for many reasons not least being to protect the remaining franchisees in the network from unwanted competition.