What goes into a franchise contract
Investing in a franchise can be exciting and frightening in equal measure. It’s one of those momentous decisions that will shape your life. For most people it’s a positive experience that leaves them much richer than before. And not just in monetary terms. But, remember, this is a serious commitment. You are forming a long-term partnership with the franchisor. And the franchise agreement – the contract – is what cements that relationship.
It is not, however, a relationship of equals. The franchisor is granting you a licence to operate under their brand name. And if you do anything to seriously damage that brand, it could leave you much poorer than before.
That isn’t meant to scare you. It certainly shouldn’t put you off franchising. But you do need to be aware of what goes in a franchise contract to protect both you and your investment. The people who really know what goes in a franchise contract
You’re seriously considering parting with your hard-earned savings to invest in a franchise. Perhaps you’re securing a bank loan against your property. Now you’re going to sign a legal document that has been drafted by lawyers who represent the franchisor themselves.
At this point it might be sensible to take some legal advice yourself.
But whatever you do, don’t go to just any old law firm. Make sure you choose one that specialises in franchise law. And, ideally, choose one that’s affiliated to the bfa (British Franchise Association). A specialist franchise solicitor knows what goes in a franchise contract. They’ll point out the legal ramifications if things don’t work out as you’d hoped. They will also explain to you, in no uncertain terms, what your contractual obligations are.
Importantly, they know the agreement won’t be changed for you, for them or for anyone.
A franchise contract sets out the terms for all parties. It’s designed to maintain standards and govern the franchisor/franchisee relationship. Any franchisor worth their salt won’t enter into negotiation on an agreement that, above anything else, protects their brand.
And why should they? How could a franchisor police its network consistently if franchisees were all on different contracts? Ask the franchisor what goes in a franchise contract for their particular brand, and in what circumstances they’ve had to enforce it.
Is the franchise you’re joining a member of the bfa? Because an agreement that’s written by a bfa Affiliate solicitor will adhere to the organisation’s strict code of ethics. And, of course, as the industry’s only regulatory body the bfa knows what goes in a franchise contract too.
Always start with the end in mind
One of the first things that goes into a franchise contract is your start and end date. Most franchise agreements in the UK run for five years, others run for ten years or more. But what happens when the agreement ends? Can you simply re-sign and, if so, are there any costs involved? And what happens if you don’t want to re-sign?
A lot can change in five years. A lot more can change in ten. Most franchisees would prefer to sell their business, but what happens if you need to exit early and can’t find a buyer in time? Because you definitely won’t be allowed to just walk away.
On the other hand, what if things are going exceptionally well? Can you expand your business or invest in another area? When can you sell your business for a healthy profit? Lots of franchisees sell up to get a return on their investment. The franchisor will have the final say on who buys the business. But what percentage of the sale goes to them as well?
The answers to all of these questions make up much of what goes in a franchise contract. But, be aware that the answers won’t be the same for every business you look at. Those will depend on the franchisor and their own operational practices.
How much is all of this going to cost you?
This is a business relationship. The franchisor is a commercial entity set up to make money. So some of what goes in a franchise contract will be linked to their remuneration.
The contract should make clear how the franchisor makes their money. Most charge a management service fee based on your turnover, while others prefer fixed monthly payments set out for the duration of the franchise agreement.
But do you have to buy products and materials from the franchisor as well? And do they make a mark-up on those too? That’s not a problem – so long as you remain competitively priced – as the franchisor can usually negotiate better terms with suppliers through sheer economies of scale. Or, perhaps, the franchisor is the manufacturer themselves.
And, because almost every franchised business needs to promote itself, the franchise agreement will indicate what you need to spend in marketing activities. You should also check whether there is a national advertising fund into which you must contribute.
What you can and can’t do
With more than 900 Business Format franchises in the UK, there are more than 900 franchise agreements with their own definitions and terms. What goes in a franchise contract for the specific brand you’re looking at won’t be the same as all the others. Each has its own operational parameters within which you must comply.
One of the most notable will be your territory. Is it exclusively yours and how is it defined?
Others relate to everything from your opening hours, your premises and your training, through uniforms and use of trademarks, to what insurances you must take out and the vehicles you drive.
There could be dozens more, all of which the franchisor will argue are essential to you running your business successfully. A franchise agreement isn’t just in place to punish you if you step out of line, it formalises best practice within that particular organisation.
What happens after termination?
One of the biggest concerns for franchisees is losing their investment. Or, even worse, being hit by financial penalties for a breach of contract. But, remember, that is only likely to happen if you commit a serious offence or bring the brand into disrepute.
If you work hard, follow the franchisor’s model and behave ethically, then what goes in a franchise contract is nothing to worry about.
Once you exit, though, there will be post-termination restrictions to prevent you setting up in competition with the franchisor or their franchisees. You can’t take their intellectual property and know-how, even if you have paid for it, and use it outside of that organisation.
Hopefully this guide has helped you understand what goes in a franchise contract. But for a decision as life-changing as buying a franchise, you really ought to take some legal advice of your own. And you’ll need to set aside a few hundred pounds for that.
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