Reviewing a franchise agreement carefully is crucial when buying into a franchise. It helps to ensure that the terms you sign up for reflect your legal rights, responsibilities, and long-term business interests.
These contracts are often written in favour of the franchisor, and they typically impose strict terms on how you, the franchisee, operate, promote, and eventually exit the business. That’s why it’s essential to understand exactly what you're signing up for and how it could affect your financial exposure, control over your business, and future plans.
If you're at the point of reviewing a franchise agreement, getting early advice from our franchise solicitors can help you spot any red flags, understand your position, and make sure the deal truly works for you.
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Key terms in franchise agreements
Franchise agreements typically favour the franchisor, including provisions to monitor the franchisee’s performance, protect the brand and intellectual property, and limit franchise operations. These agreements usually grant franchisees rights to training, guarantees of quality of goods or services, and marketing support. They also typically define the conditions for selling the franchise and the terms of the agreement, e.g., options to renew or terminate early.
Some key terms in a franchise agreement and what they may include are:
- Exclusive rights in franchising: Franchises may include clauses granting you exclusive rights to operate in a specific territory, preventing competition from other franchisees. You must ensure the franchise agreement defines these rights and the territory boundaries.
- Fees: This includes the amount you will pay, how and when, and whether interest will be charged on late payment.
- Franchisor’s initial duties: E.g., to grant you the right to use software, allowing you to use the franchisor’s brand name, and providing support and advice to launch your franchise.
- Franchisor’s continuing duties: E.g., to provide ongoing support, know-how, and instruction manuals, and to supply products or other materials such as stationery.
- Your initial duties: E.g., to operate the franchise per the manual and as the franchisor may specify, and to promote and protect the business's goodwill.
- Advertising: You may be required to promote the brand or contribute towards the franchisor’s marketing efforts.
- Premises: The franchisor will want you to keep the premises attractive and clean, not make any alterations, and operate it in accordance with the manual.
- Intellectual property: This concerns your rights to use the franchisor's trademarks and other intellectual property rights.
- Sale and assignment: This may cover any restrictions on your right to sell or assign the franchise and any requirements for the franchisor’s approval. If you want to sell the franchise to someone else, a franchisor will typically want to approve the person you sell it to.
- Termination: This will lay out when the agreement will end, and under what circumstances, such as a breach of the agreement.
- Consequences of termination: This is about what rights flow to the parties in the case of a termination, such as allowing the franchisor to step in to run the business.
- Restrictions: For example, the parties agree not to use the franchisor's confidential information and refrain from starting a competing business. This clause may continue after the agreement ends, but only for a reasonable period.
- Disputes: This will specify how disputes will be handled.
Legal rights and protections
A franchise agreement is a legally binding contract often designed to protect the franchisor's brand and business model. These agreements typically set out key rights and obligations, including how you can use the franchisor’s intellectual property, the operational standards you have to meet, and which fees you are required to pay.
You may find certain provisions in the agreement that give you some protection, e.g. warranties and representations by the franchisor that confirm financial information they’ve given you about the business. You may be able to sue for compensation if these are proven to be false. Other examples include promises by the franchisor to let you know if they are selling the business or considering it, so that you can prepare.
Personal liabilities and costs
Anyone can buy a franchise, whether as a sole trader, a partner or through a limited company. However, if you use a limited company or operate a limited liability partnership, the franchisor may ask you to sign a personal guarantee, making you directly responsible for performance.
If you act as a sole trader, you’ll be personally liable for any franchise liabilities. If you use a loan to finance the franchise, the bank may also require a personal guarantee, and the franchisor may request sufficient capital upfront. Confidentiality agreements may also bind you personally. As such, it’s vital to carefully consider potential liabilities before entering a franchise.
Negotiating your franchise agreement
Franchisors typically try to limit negotiation within franchise agreements. However, key areas such as support, fees, and territory may be open for discussion. Although agreements usually favour the franchisor, franchisees may be able to request certain amendments, and a lawyer can help you push back where necessary.
Franchise agreements are detailed and reflect long-term commitments and rights. A franchise lawyer can help you understand these terms, identify the risks, and ensure the agreement aligns with your business and financial goals. They can also warn you of red flags to be aware of, such as broad and onerous indemnity provisions in favour of the franchisor. By engaging legal advice early on, you will find yourself better placed to reduce risks and clarify your obligations, which can help prevent problems later.
Renting premises
Obtaining expert advice from commercial property solicitors is critical for any property arrangement. You’ll need to consider a range of issues, such as health and safety requirements and managing asbestos where relevant. The premises should provide reasonable temperatures, adequate space, ventilation, proper lighting, and toilet and washing facilities.
Renewing or exiting your franchise
If you plan on staying in business long-term, make sure your agreement includes a renewal clause. This typically requires giving the franchisor written notice before the end of the term. Franchise renewals usually involve a renewal fee, and you may also need to confirm that you’ve not breached the franchise agreement.
If the agreement permits it, you can end your franchise early. However, if this is not an option, franchise agreements generally end in specific ways, e.g., due to a breach, by mutual agreement, or on the sale of the franchise.
A franchise agreement often includes restrictive covenants to protect the franchisor's interests post-termination. These may prevent you from competing with the franchisor, soliciting its employees or customers, or using confidential information. Covenants may apply for a specific duration and geographic area. As such, making sure any restrictions don’t hinder your future business plans is key. Restrictive covenants are subject to strict legal rules, and you may be able to negotiate them, especially if you have legal support. This is another critical reason to review your franchise agreement closely with your solicitor from the outset and address concerning issues before you commit.
Understanding franchise agreements
Signing a franchise agreement is a significant and potentially rewarding step, but only if you fully understand what it commits you to. With the right legal advice, you can avoid unpleasant surprises, push back on unreasonable terms, and enter the agreement on a far firmer footing.
Our expert franchise solicitors can support you through the review process, help you negotiate terms that reflect your interests, and ensure you’re well-prepared for the journey ahead.
