Why Do Franchise Agreements Favour the Franchisor?November 2, 2018
Prospective franchisees often ask, ‘Why does the franchise agreement favour the franchisor?’
It’s a good question – after all, most franchisees will invest a great deal of time and money making their franchise a success. Yet, the franchise agreement is a one-sided (usually non-negotiable) contract that favours the franchisor, in terms of the protections and rights it offers. So, why is this?
Below, we explain the key purpose of the agreement and reasons for its bias:
1. Brand Protection
For most franchisors, their brand will be their most valuable business asset. It enables their concept to be replicated across different territories, whilst remaining consistent and instantly recognisable to customers and the wider public. So, the franchisor needs to ensure their most valuable asset is legally protected. This is the purpose of the franchise agreement.
The franchise agreement grants franchisees the right to use the franchisor’s brand (including registered trade marks and “know-how”) to market their business. The agreement also contains certain restrictions and obligations that ensure the franchisee does not misuse the brand assets in any way that could undermine the business’ reputation and viability. In short, brands are powerful so they need powerful protection!
With this in mind, obligations and restrictions placed on the franchisee include:
- Non-compete obligations – Provisions preventing the franchisee from being involved in a similar or competing business during or following the franchise agreement’s term. Without these provisions, franchisees could simply set up their own business, replicating everything they learnt from the franchisor.
- Adherence to the operations manual – The operations manual details exactly how the franchise should be operated, including how the brand can and can’t be used. The agreement will include terms prescribing strict adherence to this manual.
- Purchases – The agreement states if the franchisee is required to make certain purchases (e.g. equipment/machinery) from approved suppliers (details will be included in the operations manual).
- Contract termination – The franchisor has the right to terminate the agreement for a wide range of reasons. By comparison, the franchisee will usually have few or no rights to terminate.
For the sake of fairness and consistency, franchisees should all be on the same contract terms. This way, all franchisees within the network will follow the same terms regarding how they operate their business. This is especially important with a franchising model, as its success is built on the replication of a trusted brand.
Take the booming food and beverage sector for example. Most UK highstreets now feature a handful of well-known coffee shop franchises (Costa and Starbucks to name just two). Their success is built on a loyal customer base, who’ve come to expect the same, familiar service, regardless of which town they’re buying their favourite coffee in. This can only be achieved if every franchisee is operating under the same terms. What’s more, other franchisees within the network are likely to feel pretty disgruntled if one franchisee is granted widely different contract terms.
So, to keep customers and franchisees alike happy, the agreement must be consistent throughout the network!
3. Quality Control
Most franchise agreements also contain minimum performance targets (especially for more established franchise brands). These targets state what the franchisee is expected to achieve and what will happen if they fail to do so. Consistent failure to meet targets could be a breach of the franchise agreement. So, it’s important that these targets are realistic.
The purpose of performance targets is to:
- Set clear expectations for each franchisee.
- Incentivise performance.
- Identify any struggling or underperforming franchises as a means to address the situation and provide support if needed.
- Maintain consistency and quality standards throughout the franchisee network.
4. Protects the interests of other franchisees
As mentioned, the franchisor is entitled to terminate the agreement for a wide variety of reasons. By comparison, the franchisee will usually have no express right to terminate. The franchisor’s rights here may seem far-reaching and unfair but they are important; any breach of the agreement could have a detrimental effect on their brand’s reputation and the commercial interests of other franchisees within the network.
If one franchisee flouts the terms of their agreement, this could jepordise the success of other franchisees operating under the same brand. After all, if one coffee shop in the network acquires a bad reputation – word quickly spreads throughout the entire brand’s customer base.
The franchisor must retain control over who can and can’t continue being a franchisee. This enables the franchisor to protect the brand, as well as the commercial interests of all franchisees in the network.
Get Your Franchise Agreement Reviewed
As we’ve established, the franchise agreement may seem one-sided but it is actually designed to benefit, not just the franchisor, but all those with a vested interest in the business. With this in mind, most franchise agreements are non-negotiable.
However, we strongly recommend that all franchisees get their franchise agreement reviewed by a specialist franchise lawyer. This is also encouraged by the British Franchise Association (bfa). A franchise agreement review ensures you fully understand the terms of your agreement and your legal obligations. A specialist franchise lawyer will also ensure the contract terms are reasonable and ethical.
Get in touch to speak to one of our expert franchise lawyers today.