What documents should I understand before buying a franchise?

Buying a franchise can be an exciting opportunity. However, it also comes with a range of documents and agreements you need to understand before committing.

These documents protect both you and the franchisor, outline financial expectations and define your legal obligations.

To make sense of it all, we’ve broken down the key documents and agreements you may encounter, from basic disclosure papers to complex development agreements, using insights from experienced franchise experts.

What pre-contractual documentation might I have to sign?

Before signing a franchise agreement, you may encounter pre-contractual documentation, such as confidentiality or preliminary agreements. Shelley Nadler, legal director at Bird & Bird, explains: “Often franchisors will provide confidential information to franchisees, and they want to be able to protect this information and prevent its disclosure.

“They ask franchisees to enter into confidentiality agreements. This is perfectly normal and accepted practice.”

Other pre-contractual agreements may cover finding premises or other preparatory work. Nadler advises: “If the franchisor cannot find suitable premises within this period, then they should return [your] deposit, although the franchisor may want to offset any expenses it has incurred.

“You need to clarify the position regarding the return of deposits taken from you if you do not proceed.”

Starting with these documents helps protect the franchisor’s confidential information and sets expectations for early-stage negotiations.

What is a deposit agreement?

A deposit agreement is often the next step once you show serious interest in a franchise. Nadler explains: “A deposit agreement is a contract entered into between a franchisor and a prospective franchisee in the negotiation stages. This is before the parties enter into a formal franchise agreement.

“The purpose of the agreement is to set out what deposit the franchisee must pay to the franchisor, the purpose of the deposit and the circumstances in which the deposit will or will not be refundable.”

If you go on to sign a franchise agreement, the franchisor should usually reimburse your deposit. Alternatively, they may set it off against your initial franchise fee.

Nadler notes that any deductions for expenses must be clearly specified in writing. This covers costs such as estate agent, surveyor, solicitor or accountant fees, as well as research on your intended territory.

What is a Franchise Information Memorandum (FIM)?

Once you’ve shown serious interest, you may receive a Franchise Information Memorandum (FIM). This is a document that gives an overview of the franchise.

John Pratt, senior partner at specialist law firm Hamilton Pratt, explains that “it contains information about the history of the franchisor’s business, individuals involved, number of franchise businesses in existence and what makes the franchise special. It will also contain financial information.”

Pratt cautions about the financial information. “Inevitably, franchisors want to paint as positive a financial picture as possible about their business and therein lies the danger.

“Whenever financial information about start-up costs, turnover, profit margins and so on are provided, they need to be based on the average performance of franchisees or the franchisor’s performance if, at the time, there are no franchisees.”

A FIM helps you understand the franchise concept, its history and its financial viability before signing any formal agreements.

What information is contained in a franchise disclosure document?

Some franchisors also provide a franchise disclosure document, which is more detailed than a FIM. Pratt explains the UK context: “Unlike the US and an increasing number of other jurisdictions, there is no legal obligation on franchisors to provide any relevant information to prospective franchisees about their franchise business.

“They may have a glossy brochure, but this falls far short of the very detailed disclosure documents that you see in the US.

“Increasingly, however, franchisors in the UK are providing detailed disclosure information to prospective franchisees. If the franchisor that you have approached does this, you should consider it to be a definite plus.”

Even with a disclosure document, it’s essential to carry out your own investigations. This is because the franchisor is generally not legally responsible for pre-contractual representations.

I’ve received the franchise disclosure document. What questions should I ask?

If you receive a disclosure document, it’s important to review it carefully. Pratt advises: “Ensure that there is nothing in the information that surprises you. Focus, in particular, on any forecasts that have been provided. This is so that you are absolutely clear of the basis of any such forecasts.

“They need to be based on the average performance of franchisees and not simply the ten best-performing franchisees.”

You should also request a full list of franchisees and check that all the information is accurate. “If the information contained in the disclosure document is not true, untruthful comments could amount to a misrepresentation, in respect of which you would be able to bring a claim.”

What is an ‘intent-to-proceed’ agreement?

You may sign an intent-to-proceed agreement, also known as a territory reservation agreement, before a franchise agreement to secure a territory.

Vicky Wilkes, head of legal at Aston Villa Football Club, explains: “From the franchisee’s point of view, one of the main aims of the agreement is often to secure a territory in which the franchisee wishes to operate the franchise.

“It may therefore offer a degree of ‘exclusivity’ for a particular territory while final negotiations between the franchisee and franchisor continue.”

Wilkes emphasises that signing this agreement does not obligate you to proceed. “The agreement will usually set a deadline by which the franchise agreement should be signed or the deal will not proceed.”

An intent-to-proceed agreement usually involves a deposit, which should either be refundable or credited toward the full franchise fee.

What’s a development agreement?

Finally, for franchisees looking to operate multiple outlets or manage a specific territory, a development agreement may be used. Pratt explains that “it’s an agreement that allocates a specific territory to a franchisee – almost always on an exclusive basis – in which the franchisee is entitled to open a specified number of franchise outlets.

“Franchisors argue they are better off investing their limited resources in recruiting franchisees who have the desire and wherewithal to open a significant number of franchised outlets.”

Development agreements include schedules that outline how many outlets you must open to retain exclusivity. Each outlet typically requires a separate franchise agreement, though in some cases development obligations are incorporated into a single agreement.

Understanding the full picture

Franchise documents and agreements may seem overwhelming, but each one plays an important role in protecting both parties and clarifying expectations.

From initial pre-contractual agreements to complex development arrangements, taking the time to read, question and seek professional advice is essential. Being thorough at this stage ensures the journey with your chosen franchise opportunity starts on solid ground.