Franchise Agreements: The Key Clauses to Consider

• Reduced risk – Joining a franchise can be considered a safer and more reliable way of starting a business rather than setting up from scratch.
• Established brand and customer base – Establishing a new brand can take many years and significant effort and expense, but with a franchise, customers already know the brand, and an advantage can be taken from the advertising and brand awareness already developed by the franchisor.
• Training and support - In many cases, the Franchisor will have an established training system in place to help Franchisees launch their businesses. In addition, the Franchisee is likely to become part of a larger network, thereby gaining access to successful marketing and operating strategies and also being able to work with other Franchisees to share ideas and best practices.

Advantages for Franchisors:

• Growing a business – franchising can be an efficient way of growing a business and accessing new territories without significant expenditure.
• Steady cash flow – initial ‘start-up’ fees as well as ongoing royalty payments can produce a steady stream of income for Franchisors.
• Brand development – franchising can allow Franchisors to gain access to more markets and locations faster, thereby developing the brand into new locations

Whilst franchise agreements can be very lengthy and detailed and can vary depending on the sector, the following are some of the key terms which the agreement should cover:

Term/Renewal

It is important that the agreement clearly sets the duration of the contract. Generally, franchise agreements start with an initial term (often 5 years) and offer the Franchisee the opportunity to request a renewal term (subject to satisfying certain criteria).

Territory and Exclusivity

The agreement should expressly set out the geographical area within which the Franchisee may operate the business and confirm whether the Franchisee has the exclusive rights to operate within that area.

Franchisee and Franchisor Obligations

The agreement should outline all of the specific obligations that the Franchisee is expected to adhere to, such as compliance with any performance levels, ordering from specific suppliers, maintenance of certain equipment and any other responsibilities that are critical to the operation of the franchised business. It should also set out any obligations that the Franchisor is to comply with such as providing regular training and support services to the Franchisee.

Fees and Payments

The agreement should set out the details of the initial fee (if any), as well as any ongoing management fees and royalty fees payable by the Franchisee.

Intellectual Property Rights

The agreement should grant the Franchisee adequate rights to use the Franchisor’s intellectual property rights in the course running the franchise business. In addition, the Franchisee’s should ensure that the intellectual property rights are adequately protected (such as registered trademarks) and that the operational know-how is made available in a comprehensive operation manual.

Selling the Franchise Business

The agreement should include a right for the Franchisee to sell the franchise business. Often, the Franchisor will include a right of first refusal to acquire the franchise business itself. If it chooses not to exercise such right, it will usually include a list of conditions which the incoming franchisee must satisfy – to allow the Franchisor to maintain control over the suitability of the incoming franchisee.

Termination and Consequences

The agreement should clearly outline the termination rights of both parties. Generally, the Franchisee will have fewer grounds (if any) than the Franchisor to terminate the agreement prior to the expiry of the initial term – this is mainly because most of the obligations under the agreement fall upon the Franchisee.   The agreement should also outline the consequences of termination, which may include the return of confidential information, de-branding and the removal of any sign or reference to the franchise.