How Turn A Franchise Agreement To Your Advantage
By Martin Truman, Fri Dec 9th
Deciding to buy a Franchise is a huge decision. Once you haveconvinced yourself that franchising suits your character andbusiness aspirations, have identified the right franchise, doneyour sums, attended the initial training and perhaps paid aninitial deposit you will be presented with a Franchise Agreementto sign.
Typically this agreement could run to 40 or 50 pages and can bea daunting read to those unfamiliar with commercial contracts.The very nature of a franchise business structure means that theagreement will be fairly complex. Remember that this documentprovides the framework for your business life over the nextseven years or so.
Franchisors, particularly established ones, will rarely changeor negotiate the terms of their standard Franchise Agreement asthey will want to maintain uniformity across all the franchises.However, it is essential that you understand what you are beingasked to sign. Once you have signed an agreement as a businessperson (without the cotton wool treatment given to consumers)you will struggle to persuade a court later that the terms wereunfair or sufficiently unreasonable to be void. You will bestuck with it! I strongly recommend that you seek legal advicefrom a commercial solicitor familiar with franchising.
Key areas include establishing the true cost of the franchiseincluding ongoing royalties, advertising costs, minimum stockpurchases. What location and territorial rights have beengranted? Are these exclusive to you? What property and equipmentis required? What obligations are there on you and theFranchisor relating to the ongoing operation of the franchise?
Often the most complex area relates to renewal and terminationof the franchise. Are you granted an automatic renewal rightbeyond the franchise term of 5 or 7 years? What renewal fee ispayable? Can you sell the franchise on? Usually you will need togive the franchisor first option and/or a right of veto over theacceptability of any proposed transferee, often coupled with a %fee. What are the consequences of an early termination by you ifyou want or need to get out prematurely? There will usually be aminimum period with forfeiture of the franchise fee, stock andpossibly other financial penalties and compensation. What if youare in breach? What circumstances would lead to an automatictermination? Are you given a period in which to remedy yourbreach?
Ask yourself some "What if?" scenarios. What if you died or wereseriously ill? What if you failed to meet your sales targets?What if you wanted to sell product out of your territory? Whatif a customer sued you for faulty products? If you cannot answerall your What ifs, do seek more advice. Don't be afraid to askthe Franchisor these questions. But don't expect an impartialresponse. The Franchise Agreement will usually have an expressterm preventing any reliance upon representations or claims madeby the Franchisor in the initial presentations or documentation.Much to the disappointment of many clients who come to us foradvice having run an unsuccessful franchise, this appliesparticularly to any claims as to how much money can be earnt¡Buyer beware!
About the author:
Martin Truman is head of commercial law firm, TruelegalSolicitors. For more information about Franchise Agreements visit The Legal AdviceCentre.
