Vicki Mitman, solicitor at Leathes Prior, highlights the legal documents franchisees need to consider when investing in a franchise
There are several core legal documents that form part of the franchise relationship. Arguably the most important of these documents is the franchise agreement, which I will discuss in more detail below.
This is often the first document a prospective franchisee will come across. It usually forms part of the franchisor’s marketing materials and is often seen around franchise exhibitions or provided by the franchisor during the early stages of enquiry.
The prospectus contains a general overview of the franchise operation and may also contain financial information of pilot franchises or trading franchises and possibly financial projections.
Confidentiality agreement or intent to proceed/ deposit agreement
A prospective franchisee may be asked to sign one or both of these documents in order to proceed with their enquiry. Franchisors have usually spent a lot of time and money developing their unique offering and it’s important the information they share with prospective franchisees is kept confidential.
An intent to proceed agreement may be used when a prospective franchisee wishes to reserve a territory and the franchisor may also look to take a deposit at that stage. If the franchisee does not proceed, the deposit - if any - should be refundable, less any direct third party expenses incurred by the franchisor.
Information memorandum /disclosure document
Although not required in any particular form, franchisors often have a bank of information relating to their business and the franchise offering. It is likely this information will only be provided after a prospective franchisee has signed the confidentiality or intent to proceed agreement.
It’s also likely this information will contain details of financial performance or projections. Prospective franchisees are advised to discuss any such projections with the franchisor in order to gain a clear understanding of where the figures originated.
This document should be uniform for all franchisees in a franchisor’s network. Often, franchisors will say their franchise agreement is nonnegotiable. This is so they are treating all franchisees fairly and on similar terms.
If there are any variations to the franchise agreement to address specific circumstances of a franchisee, these may be dealt with in the schedules to the franchise agreement or in an appropriate side letter, which is signed at the same time as the franchise agreement and forms part of it.
The franchise agreement should clearly set out details of the parties, business system, brand and use of the brand, along with other key terms and features. The franchisee’s obligations clause will be substantial and typically includes initial and ongoing training, staffing, financing and accounts, payment of fees, minimum performance, attendance to business, use of and compliance with the business system and insurance.
If franchisors operate national account customers, where franchisees from different territories would be required to service them, that should also be detailed in the franchise agreement. In addition, there will be provisions regarding the franchisee’s rights to sell their business.
This may be a separate document or dealt with in the body of the franchise agreement. Its purpose is to specifically licence to the franchisee the right to use the franchisor’s trademarks.
One of the most important aspects of franchising is the franchisor’s name and brand. Often, franchisors will protect their brand - logo or trading name - via a registered trademark and it’s an important part of the due diligence process to check this.
Each franchise should have a manual that details the operational aspects of running the business. Franchisees are typically provided with a copy of - or access to - the manual after completion of their training and once the franchise agreement has been signed.
Manuals may be hard copy or electronic and sometimes accessible via a franchisor’s computer system or web portal. Franchisors may allow prospective franchisees to view the manual under appropriate conditions of confidentiality before signing the franchise agreement, but would not normally allow long-term access or copies to be made.
There may also be standard form documents used throughout the franchisee network, such as employment contracts, order and booking forms and standard terms and conditions.
Sometimes franchisors may require its franchisees to enter into a separate software licence - where a franchisor has developed a software system bespoke to its franchise - although often these licences are contained in the body of the franchise agreement.
If franchisees are required to take on a premises from which to conduct their franchise business, there will likely be a lease and related property documentation to consider as well. In some franchises, there may also be a vehicle lease.
Prospective franchisees should review carefully the franchise opportunity they are considering and make relevant enquiries of the franchisor and other franchisees in the network. The due diligence process is very important for prospective franchisees, so that they have a clear understanding of what they are getting into, bearing in mind it could well be a five or 10-year investment.
It’s strongly recommended that prospective franchisees take advice on the franchise agreement from solicitors experienced in franchising. Franchising is a niche area of commercial law and not many solicitors deal with franchise agreements.
It is likely to be more costly if franchisees take advice from someone not familiar with the industry. Often, franchise specialists will offer a fixed fee review of a franchise agreement and, if required, provide assistance on premises acquisition, company set-up and employment advice to dovetail with its advice on the franchise agreement.
Most importantly, the franchisee should be clear about the terms on which they are taking up the franchise and go into the relationship with their eyes open.
Aside from the legal aspects, prospective franchisees should consider the franchise offering as a whole. Speaking to existing franchisees in the network is an essential step in the due diligence process. Also, the British Franchise Association website provides useful resources, including a list of questions to consider asking a franchisor to ensure you get as much information as possible. There are also loads of franchising book available, we suggest starting with one of these great books written by some leading names in franchising.
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