Franchise agreements are usually lengthy (around 40-60 pages) and contain many obligations and restrictions on the franchisee. Before signing the agreement, it is important to take advice from a BFA affiliated solicitor who will be used to seeing franchise agreements from across the industry. Whilst the terms may be stated to be non-negotiable, it is still vital that you are aware of your legal position.
The following areas are of particular significance:
Check that the initial franchise fee and royalty payments correspond with what you have been told by the franchisor. Also, will you have to pay any other costs e.g. for equipment and additional training; and will there be further costs if you wish to renew at the end of the term?
Most ongoing royalty payments will be calculated as a percentage of turnover and not as a percentage of profit and, therefore, you could still be required to make payments to the franchisor even if your business is making a loss. Finally, watch out for unexpected costs i.e. often if you choose to sell the franchise business you will have to pay the franchisor a percentage of the sale price, particularly if they have introduced you to the purchaser.
Where the franchisee is a newly formed limited company, the franchisor may require the individual behind the franchisee company to give a personal guarantee. You may be referred to as the “individual” or the “principal” and this means that you will be personally liable to the franchisor in the same way as the (company) franchisee. If the franchisee company is in breach of any of its obligations under the agreement, you will be personally liable for the full extent of any losses suffered by the franchisor. In such circumstances, it is common for the franchisor not to have to take steps to enforce its rights against the company, before pursuing you.
Restrictions on your business activities
Franchisees are often prevented from being involved in other business interests during the term of the franchise agreement. If you have other business interests you will need to ensure that the franchisor consents in writing to you continuing to operate them.
Something franchisees are normally unaware of are the restrictions put in place post-termination, preventing them from being involved in a business which is the same or similar to the franchise business (the post-termination restrictions normally cover a specified geographical area and last for a set period of time i.e. one year post-termination). Such restrictions could have a significant impact on you in terms of your ability to carry on in your chosen industry following termination of the agreement.
There are often extensive termination provisions in favour of the franchisor, enabling it to terminate early, if the franchisee is in breach of the agreement. However, once the agreement is signed, the general position is that the franchisee is unable to terminate until the end of the initial term (typically five years) even if the business is not working. A franchisee may be able to argue that there has been a misrepresentation by the franchisor in terms of what they have been sold or the franchisor is in breach of the agreement. However, such cases can be difficult to establish and are seldom clear cut. Alternatively, the franchisee may be able to sell the franchise business on. This is likely to be difficult if the business is failing or has little goodwill.
Franchise agreements include a clause which states that the agreement represents the whole agreement between the franchisor and franchisee. As mentioned above, franchisors are not keen to negotiate the terms of their standard franchise agreement and to make amendments save where there is an obvious error (often this is no more than a clerical error). Therefore, if you have been told or promised anything which induced you to buy the franchise, this must be set out in writing and annexed to the agreement. Side letters should be properly drafted and checked by your solicitor to ensure they are legally enforceable and can be relied upon.
The obligations of the franchisee under the franchise agreement will be extensive and specific. This is in contrast to the obligations of the franchisor which are often quite general and sometimes difficult to interpret. You must read each obligation in detail and ensure that, on a practical level, you are able to fully comply.
For further information please contact me.