What are the key elements of a franchise agreement?
Friday 19th October 2018
The franchise agreement documents the rights and legal obligations of the franchisee and franchisor. Although every franchise agreement is different, there are some essential elements you should expect to see in every agreement and some key points to check:
Intellectual property rights – The agreement grants you the right to use the franchisor’s brand (intellectual property assets) to market your business. It should list relevant trade mark registrations for the country you will operate in. Beware if the agreement does not show that the franchisor has registered their brand properly.
Granted territory – The agreement states where you are permitted to operate the business. Will you have exclusive territory rights?
Contract length – Franchise agreements usually range from 5-10 years. Make sure you know how long you’ll be tied into the contract. Once signed, you won’t have the right to change your mind.
Contract renewal rights – Make sure you have the right to renew the agreement at the end of its term and that the franchisor does not state unreasonable terms, or charges a large fee for letting you renew.
Franchisor’s obligations – This should include your initial training and ongoing support. Check that the agreement contains an obligation on the franchisor to act in good faith.
Franchisee’s obligations – These are likely to be long and onerous. Make sure you understand what’s expected of you. Be aware that the franchisor is entitled to enforce these literally – they do not need to give you second chances.
Rights to sell the business – Can you sell your business to a third party without the franchisor imposing unreasonable conditions or chasing unreasonable fees?
Contract termination – The franchisor will be entitled to terminate for a wide variety of reasons. Make sure you are aware of these.
Non-compete obligations – The agreement will almost certainly prevent you from being involved in any similar or competing business for a year or more after termination. Make sure you understand how these restrictions will affect you.
This list isn’t exhaustive. A specialist British Franchise Association affiliated solicitor can review the contract to help you understand your legal obligations and ensure the terms are reasonable.
Author: Roz Goldstein