Do you really need a Franchise Agreement?

Franchise Lawyers are expensive. Contracts are scarcely worth that paper that they are written on these days so why bother? These are the thoughts of some who don’t understand the nature of franchising

It is strange that a franchise relationship starts with a detailed and restrictive legal agreement in a way that no other relationship is governed– even partnerships often begin with a quite loose agreement that evolves over time.

Let’s look at this from the standpoint of both parties.

First, the franchisor.

As a franchisor you are about to put your brand in the hands of somebody else. You are going to entrust them with your trading know-how, your methodology, some secrets perhaps and, importantly, your reputation. In return the franchisee will pay you money. You may feel that if the relationship doesn’t work out too well your solution would be to simply cease doing business with your franchisee and therefore an expensive legal agreement is unnecessary. Or perhaps you feel that you can quite readily collect a template legal agreement from the internet and simply adjust it to fit your purposes, and it will do the job. Think again!!

Probably the best investment you will make as a franchisor is in a franchise legal agreement!

A controversial statement perhaps and here is why:

At some point a franchisee will act inappropriately and you will need to take action quickly. To do so, you need a clear set of rules, and an understanding of what happens if those rules are broken. Essentially that is what the legal agreement is all about.

The legal agreement licences the franchisee to undertake certain things but not to act outside the legal agreement. It determines what happens in the event of unknown events such as the death, incapacity or bankruptcy of a franchisee. If the franchise is premises based, then it contains some very clear guidance about what would happen if the franchisee ceases to trade bearing in mind that the franchisor may wish to continue to have access to that location for a future franchisee or even for their own trading purposes. It also covers essentials such as misuse of Social Media, acting improperly perhaps through failing to declare earnings, or buying products from non-prescribed suppliers

The legal agreement sets out what happens in the event that the franchisee wishes to terminate the agreement early. Can they? Should they? Should the franchisor lose future income?

The agreement incorporates all the controls that the franchisor may wish to put in place to protect day to day trading, the brand and its reputation and its network.

None of these things can be determined on a ‘gentleman’s agreement’ – nor are they enshrined in common law. You need a specific legal agreement to run your franchise network by.

The Franchisee

As a franchise you are about to embark on a relationship with the owners of an established and successfully operating concept whom you trust to provide what they say they intend to provide when the relationship begins. Maybe that relationship won’t work out as you expect, and unless there is a legal agreement that you have been able to see and have explained to you by a lawyer before the start of the relationship and handing over money, you will not have clear definition about how to proceed.

Probably the biggest problem that franchisees experience in their relationship with franchisors is when they have been led to believe that they will receive a level of support, or will achieve certain levels of turnover or profit which turn out not to be the case. What happens then? Is it tough luck? Is your investment lost? No!!

A franchisee has rights and those rights are described in the legal agreement. Inevitably the agreement will be more in favourable to the franchisor than the franchisee but it should be fair and reasonable – which is why you are advised to go to lawyer to have it explained to you and verified – do not expect the franchisor to change it because that agreement should be consistent across the whole franchise network. You may be able to negotiate some terms around the deal that are shown in an additional side letter but the fundamental agreement will remain the same.

In fact, it is important to you that the franchisor does have a strong legal agreement because if you join a network where there are a number of franchisees and if one of them acts to the detriment of the brand then you as an ‘invested’ part of the network want the franchisor to be able to control the situation swiftly and reduce negative brand impact. In other words, you want the franchisor to be a police officer and in order to be a police officer you want the franchisor to have a good legal agreement.

Legal agreements are not cheap; no legal agreement at all is more expensive!

The best advice and guidance to both franchisor and franchisee is to take advantage of the services of any of the affiliated consultants and lawyers shown at the BFA website. Ashtons offer both aspects, in a unique manner

Please submit a request form for further assistance and guidance from Ashtons Consultancy

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