Five franchise agreement clauses franchisees need to know about
When starting your franchise business, the terms of the franchise agreement offered by the franchisor are extremely important as they will govern the parties’ relationship going forward. The franchise agreement will impact on everything to do with the business – from how you operate through to the costs you will have to pay.
You need to understand what your rights and obligations will be before you sign up – so getting expert advice from a specialist franchise lawyer on your franchise agreement (and making sure you fully understand everything) is crucial.
Although not exhaustive, we set out below our top five clauses which franchisees should look out for when negotiating with their franchisor.
1. Term and renewal of the franchise agreement: This clause sets out the length of the agreement between the parties. Normally this is five years, but sometimes this is ten years- normally where there is a lot of set up involved in opening a franchise or the initial fee is large. For example, a domiciliary care franchise will require registration with the CQC and this is a time consuming process.
The clause also covers the franchisee’s right to renew the agreement, as well as the conditions for renewal which the franchisee will need to fulfil. In an ethical agreement the franchisee will have the right to at least one renewal – providing that they are not in breach of their franchise agreement.
2. Advertising: This clause sets out the parties’ obligations with respect to the advertising, marketing and promotion of both the franchisee’s business and the franchise network. Buying a franchise means you are taking advantage of the franchisor’s good name, but you will still need to market your business locally. As a business owner the franchisee will be responsible for the advertising of that business.
3. Trademarks: This important clause sets out the franchisee’s obligations with respect to its use of the intellectual property and trademarks belonging to the franchisor. It also sets out the franchisor’s own rights and interests with respect to intellectual property. Make sure that the person who owns the trademark – check at the Intellectual Property Office – is the same as the franchisor listed as party to the franchise agreement. You should confirm that the franchisor is entitled to give you the right to use the trademark.
4. Death or incapacity: This clause sets out what will happen should something unexpected happen. You should expect that the franchisor will appoint a manager in the event of the death or incapacity of the franchisee. This will be at cost to the franchisee, but it means the business doesn’t grind to a halt in one of those situations.
5. Sale of the franchise: How you exit the business and realise your investment is obviously important. This clause sets out the parties’ rights and obligations regarding the sale of the franchisee’s franchised business and specifies the conditions upon which the franchisee may sell the business. An ethical franchisor will give the franchisee the right to sell their business to a suitable incoming franchisee.
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