Franchising in the UK
The Franchise Agreement
A franchising agreement is a contract like any other, entered into between franchisor and franchisee. It sets out the relationship between both parties. Usually the agreement will appear to be initially biased in favour of the franchisor, but this is required for the franchisor to maintain necessary control over the wider system. Franchisors risk their reputation and names on the performance of their franchisee network, so it's reasonable and fair that certain obligations are placed contractually on the franchisee. One of the most fundamental cornerstones of franchise success is consistency between units, and necessary compliance, and this will be evident from the contract arrangements.
Despite this however, no standardised franchise agreements exist, and no two agreements or contracts are wholly alike. This is because franchises cover a range of business types, across many industries, and they operate with different characteristics. The actual agreement will be just one document that the franchisee will need to agree to and sign as part of the licencing agreement. The document set will include non-disclosure and confidentiality agreements, lease or sublease agreements, an 'offer to purchase' agreement and security agreement.
Checklist of Basic Franchise Agreement Terms and Conditions
It's impossible to correctly identify every issue and term that should be considered across each franchise situation, as agreements vary between franchises. However, the checklist below will be a useful tool to work from if you're considering buying a franchise:
- What's the initial franchising fee?
- Is any part (or the whole) of this initial fee refundable? Under what circumstances?
- What is the whole investment sum initially?
- What are the payment terms?
- Does the franchisor offer financing arrangements, or provide assistance to find the right finance?
- How much do the ongoing royalties cost? How are they calculated?
- When and how do royalties and sales get reported? How are royalties paid?
- Is the franchisee obliged to contribute into a franchise advertising fund? How much?
- How is this fund for advertising management and administered? Does it cover national and regional advertising only - or local too?
- What are the accounting responsibilities of the franchisor towards this fund?
Fees, Royalties and Other Costs
- Are any book keeping or accounting services available and / or included?
- What control will the franchisor have over the operations - particularly with regards to maintaining brand identity and checking product or service quality?
- Is an initial training programme provided by the franchisor? If so, when and where - for how long does it last and will the franchisee be required to cover any costs for accommodation, travel and the like?
- What types of ongoing support, training and assistance are provided? Do these incur additional costs?
- Are promotional aids, POS materials, direct mail programmes and the like provided - and what is the cost?
Franchisor’s obligations to the Franchisee
Questions to ask include:
- Are franchisees expected to maintain certain levels of working capital?
- Is a full time commitment to the franchise required?
- Is the franchisee obliged to purchase supplies and equipment from the franchisor only, or from an approved supplier list?
- Is there a minimum purchase quota of products set out by the franchisor?
- Will the franchisee be obliged to meet certain performance requirements? What penalties exist for failing to meet them?
- What controls are in place around unit appearance, fixtures and furnishings, equipment, replacement and maintenance etc.
- Is the franchisee under obligation to purchase their products only from the franchisor?
- Must the franchisee take out insurance cover, to the specification of the franchisor?
- Is the franchisee obliged to add the franchisor onto the liability coverage paperwork as an 'additional name insured'?
- Is it expected that the franchisee will spend a minimum amount on local advertising?
- Are hours and days of business operation defined in the agreement?
- Are there any sales restrictions imposed on the franchisee?
Questions to ask include:
- Will operating premises be required?
- Will the franchisee be obliged to lease / sub-lease the franchisor's premises?
- If a lease exists, does it run concurrently with the franchise agreement terms?
- Who holds the responsibility for lease negotiation and site selection?
- Is it the franchisor's responsibility to define the plans and premises spec?
- Who is responsible for developing the premises?
- Who is responsible for supervising how the premises are developed?
- Who takes responsibility for selecting contractors?
- How will premise development be financed?
- Will there be restrictions in place for the re-modelling or re-decorating of premises?
- Will the franchisee operate within their own exclusive territory?
- Is this territory region subject to any modifications / reductions in any circumstances?
- Will the franchisee have the option of 'first refusal' for any new franchises in the original existing territory, if there are no exclusivity rights?
Premises, Locations and Territory
Questions in this category include the following:
- What are the circumstances under which a franchisor may terminate the agreement with the franchisee?
- Does the franchising agreement define the terms for the franchisor's business repurchase?
- Does the franchisor have a duty or option to buy any/all of the franchisee's furnishings, stock, equipment or other assets, if the agreement is terminated (for sound reasons) by either the franchisor or franchisee? In such circumstances, how is value calculated, and what will the payment terms be?
- In the event of permanent disability or death of the franchisee, what provisions exist? Is the agreement assignable to the franchisee's heirs, or can the estate sell it on?
- Will the franchisee be under any restrictions towards engaging in similar businesses after expiration or termination of the agreement? And if so, which geographies does this apply to, and for how long?
- In the case of disputes, are there methods in place, such as arbitration and mediation?
Termination and Renewal
Questions to ask include:
- Is the franchisee allowed to sell the business and assign the agreement to the buyer? What are the conditions for this assignment if so?
- Must the franchisee pay any kind of assignment fee?
- Will the franchisor automatically have the first 'refusal right' if assignment takes place?
- What are the initial agreement terms?
- What are the renewal terms?
- Is the franchisee expected to pay a fee for renewal?
Term, Renewal and Assignment
- Will all trade names, trade marks and other marks be registered and owned by the franchisor?
- Is there evidence that all legal requirements regarding full disclosure have been met by the franchisor?
Other Points to Consider
What is Considered Negotiable in a Franchise Agreement?
Franchising agreements are generally viewed as 'non-negotiable' with the exception of items such as exclusive territory rights, location and opening dates. Most franchisors will be willing to clarify any ambiguous terms of clauses in the agreement documentation, or correct any identified errors. Franchisors may negotiate on points that are specific to individual franchisees, but as a rule, they won't be willing to make changes that may affect the integrity of the franchise network.
There may be greater flexibility or negotiation opportunities for new franchisors, where the agreement is evolving and new, and hasn't gone through the scrutiny of a panel of franchise lawyers, reviewing the terms on behalf of prospective franchise system buyers.
Having said that however, a franchisor who concedes more than he or she realistically should, or fails to seek adequate legal advice, will unlikely be a competent administrator and manager of the system. Franchisors who demonstrate a lack of engagement and concern for their franchisees and the business system as a whole, by agreeing to contract changes that will adversely affect the wider network - simply to gain a sale - may be franchisors to avoid. Such behaviour suggests that the franchisor is simply concerned with short-term gains and don't intend to invest in long-term success, or the provisions of the contract.