What to expect from your franchisor: the legal packJune 15, 2017
Once you have decided that franchising is the route for your next business venture and you have found the concept that you want to invest in, it is imperative that you get the legalities right.
Franchising can be a rewarding and profitable business model, but make no mistake – buying into a franchise is a commitment that comes with significant obligations and liabilities, which can sometimes extend well beyond the length of the franchise.
In our latest blog, Roz Goldstein, founder of Goldstein Legal, runs through the different documents you should encounter when entering into a franchise agreement, and what they cover, so that there are no surprises when it comes to signing on the dotted line.
A professional and high quality franchise business will have been advised to create a solid legal pack, in order to protect and support its proposition and brand. When entering into talks with a franchisor, you can expect their legal pack to contain a confidentiality agreement, a deposit agreement and a franchise agreement.
It is also worth noting that while the confidentiality and deposit agreements tend to follow a standard form, the franchise agreement needs to be a bespoke document. No two businesses are the same, so the franchise agreement you enter into should be genuinely tailor-made to suit the needs of the franchise.
The confidentiality agreement
The confidentiality agreement (often referred to as a Non-Disclosure Agreement, or NDA) is likely to be the first legal document that your franchisor gives you. Once you have reviewed the publicly available information about your chosen franchise, including the prospectus and/or franchise information pack, the franchisor will ask you to sign a confidentiality agreement before they proceed to give you any further information.
The deposit agreement
The deposit agreement will be given to you by your franchisor at the point when they are asking you to pay a deposit towards the initial fee. This would typically be when you complete your final due diligence on the franchisor and his / her proposition.
The British Franchise Association (bfa) expects that a deposit should be refundable if you decide not to go ahead. However, the franchisor can legitimately deduct actual out-of-pocket expenses incurred during your recruitment process.
The franchise agreement
A franchise agreement should be provided by the franchisor once you have decided to proceed, but before you start your initial training.
The franchise agreement is detailed and relatively long because it contains all the obligations a franchisee needs to meet in order to run the business to the franchisor’s specifications. Typically, a franchise agreement will be around 20,000 words, or 50 pages. In some cases, they can be substantially longer than that.
Although each franchise agreement is different, it will typically cover the following:
- A description of the rights and territory being granted
- The term of the agreement and renewal rights
- The fee structure
- The franchisor’s initial obligations as regards setting-up the franchisee
- The training that should be provided to the franchisee, and what levels of training must be successfully completed before she/he can start the business.
- The franchisor’s ongoing obligations, to support and assist the franchisee throughout the term of the agreement
- The franchisee’s ongoing obligations – note that this section will most likely take up the bulk of the content of your franchise agreement, and is the part which is the most “bespoke”. It will cross-refer to the franchisor’s operations manual, and these two documents will together set out a complete blueprint as to how you must run the business on a day to day level
- The minimum performance criteria that the franchisee must achieve
- Ownership of telephone numbers, domain names and social media accounts etc
- Any requirement for the franchisee to have a business plan, and how this would be discussed and/or approved by the franchisor
- How the business is to be marketed?
- The accounting records that must be submitted to the franchisor
- Trade mark rights
- The franchisee’s right to sell the franchise
- The franchisee’s obligations not to compete with the franchisor, or “steal” customers
- What happens on death or incapacity of the franchisee?
- Termination for breach
- Disclaimers of the franchisor’s liability to the franchisee.
- A personal guarantee by the franchisee, if trading through a limited company.
Ideally, your chosen franchise will be accredited by the bfa and their legal pack will have been drafted by a bfa-affiliated law firm and will meet the bfa’s requirements.
The franchise agreement may be issued either by the franchisor or by their lawyer. Either way, it is important to obtain your own independent legal advice. You are investing time, energy and money in your new venture, and you are taking on significant liabilities. It is money well spent to ensure that you have the right advice first.
A bfa-affiliated lawyer will be able to advise you on the practical implications of the franchise agreement, and anything problematic or untypical. This will help you understand the implications of the contract and it will give the franchisor confidence that you are entering into the agreement with your eyes open.
Once signed, be sure to keep copies of your confidentiality, deposit and franchise agreements in a safe place for future reference. You will then be one step closer to starting your new business venture, and will be able to proceed in the knowledge that you have a solid legal framework to support your success.
This article was originally published in the Business Franchise Magazine, June 2017, Issue 264