What types of franchise business arrangements are there?
The "business format franchise" is most common. The franchisor (ie original business owner) grants licences to franchisees for a fee, which enables them to run their own business while using the franchisor's established brand. Franchisees buy into a tried and tested business model. The franchisor provides training and assistance, while maintaining quality control to protect standards. In addition to the upfront fee, the franchisee must make regular payments to the franchisor.
Any other types of arrangement?
The word "franchise" is sometimes attached to other arrangements that are not true franchises, such as distributorships and dealerships, agency arrangements, licences, etc. A "tied house" arrangement between a brewery and a pub is often referred to as a 'first generation franchise'.
Do these all require signing an agreement?
Yes, whatever the arrangement, both parties should expect to see their rights and obligations clearly set out within an agreement. You need certainty about the terms, fees, identity of and legal relationship between the parties, responsibilities, provision for dispute resolution and agreement termination.
If I want to join a franchise network, what type of agreement will I need to sign?
A comprehensive one that explains your responsibilities, chiefly to operate the business in accordance with the franchisor's instructions, comply with legislation, keep sufficient stock, pay suppliers promptly and to provide the franchisor with important information it requests. You are liable for your own costs, such as business rates, rent, taxes and wages, and for your own legal and accountancy fees.
How long would the term be?
The agreement would typically be for five years, with options to renew on at least two occasions, so that if you're running the franchise satisfactorily, the term could be for 15 years or longer.
What about carrying out research before signing a franchise agreement?
You should carry out as much research as possible, as you would for any business. The franchisor should also put you in touch with other network members, otherwise – consider it a potential warning sign.
Should I seek professional legal advice before signing a franchise agreement?
Yes. The franchise agreement will be drafted to the franchisor's favour, so you must understand what you're signing. If you also take into account upfront fees, regular fees and possible additional fees if you withdraw early, signing a franchise agreement without proper legal advice could prove a very expensive mistake. Finding a solicitor with relevant franchise contract experience is essential.
How much in legal fees could I expect to pay for such a service?
Depends on the length of the agreement and follow-up work required, but budget for £700-£1,500.
What terms within a franchise agreement might I find to be unfair?
You may be required to buy all your equipment and stationery from the franchisor, instead of being able to shop around. The franchisor's fees may be excessive or you may be required to spend more on advertising than if you were running another business. It's also common for there to be restrictions on running a similar business to the franchise after the term has ended. The agreement will favour the franchisor, but it should not be unfair. The British Franchise Association publishes a Code of Ethical Conduct; check whether your potential franchisor abides by it.
Is there likely to be any room for renegotiating franchise agreements?
Rarely. The franchisor's solicitor will have drafted the agreement to benefit the franchisor, and unless it is a brand new franchise, other franchisees may have already accepted the terms. The franchisor is unlikely to grant you more favourable terms.
What if, after running my franchise, I find the franchisor's claims untrue?
The agreement is unlikely to contain a clause enabling you to terminate for such false representations, so you'd need to rely on contract law, terminate the agreement and possibly seek damages for your losses, but the costs and risk mean that's rarely advisable. Sufficient research before signing the franchise agreement can help you to avoid such a situation.
What if I simply stop paying the agreed fees?
You risk being sued, not only for unpaid fees, but also for the franchisor's loss of revenue for the term, because it would probably result in termination of the agreement. You'd have to stop trading immediately and restrictions on operating a competitor business may apply, so you may not be able to afford to defend a claim by the franchisor. The franchisor would usually have the right to enter your premises and enforce the terms of the agreement.
What would happen were I to lose?
Providing the action was not in the Small Claims Court (ie was for more than £10,000) not only would you have to pay the franchisor's legal costs (which could be £30,000-£100,000), you would also be liable for your own legal costs, plus damages to the franchisor. You'd also lose the business.
What if I don't operate within the strict terms of the agreement?
The agreement is likely to enable the franchisor to terminate the agreement and you're likely to have to pay fees and costs, including any costs resulting from closing the business. If you've caused loss to the franchisor, for example, by bringing the brand into disrepute, or you fail to pay the franchisor their fees on termination, they may well issue a claim against you.
Written with expert input from Laura Clarke of WBW Solicitors. In addition to franchising, Laura specialises in intellectual property, commercial agreements, corporate structures, partnerships and directors' duties.
Laura Clarke is an Associate Solicitor at WBW Solicitors. She joined the firm in 2004. In addition to franchises, Laura specialises in intellectual property, commercial agreements, corporate structures, partnerships and directors’ duties. ...