Hamilton Pratt

The Franchise Agreement

No two franchise agreements are the same but we set out below, in skeleton form, what you might expect from a franchise agreement.

 

Outline Standard Form Franchise Agreement

Whilst all franchise agreements are different there is set out below in summary form some of the provisions that may be in a standard form franchise agreement along with a brief commentary in italics.

Parties

(1)     Franchisor

(2)     Franchisee

(3)     Individuals

Note

The franchisor will almost inevitably be a limited liability company but the franchisee may be a sole trader/partnership or a limited liability company. This will depend largely on the requirements of the franchisor and the advice which has been given to the franchisee concerning the tax/legal implications of carrying on business without limited liability.

If  a franchise is to be given to a franchisee trading as a limited  liability company it is  desirable  to obtain a guarantee of the  obligations  of  the franchisee  company  from the individuals who have set up the company and who will  operate the franchise.  The reason for this is that franchisee companies are very often newly incorporated with  few  or no assets and should  the terms of the franchise agreement be breached the franchisee may not have sufficient assets to meet  a claim.  It is more difficult for individuals to put their assets beyond the reach of a franchisor.

Recitals

Note

The recitals to an agreement set out the background to the agreement and do not have any legal effect.

Definitions

Note

It is desirable in order to assist understanding to set out definitions of terms used in an agreement.

Rights Granted

(a) The Franchisor grants the Franchisee an exclusive/sole/non-exclusive licence to:
     (i) operate the Business within the Territory from the Premises
     (ii) use the trade names, trade marks etc
     (iii) use the Franchisor’s copyright, material, know-how, knowledge etc
     (iv) use the benefit of the Franchisor’s accounting management and  marketing knowledge and experience.
(b) The Franchisee shall enter into a Registered Licence Agreement when required by the Franchisor.

Note

Not all franchise agreements will grant exclusive territories and indeed many franchisors are hostile to the grant of exclusive rights.

If exclusivity is granted care should be taken in establishing the territories to be granted.   If, for instance, customers for a franchised business are likely to be obtained by way of telephone directories, the territories to be given should be linked to the area covered by the directory.

Franchise

The Franchisee will pay an initial fee of £[           ] plus VAT on execution of this Agreement.

Note

It may be desirable to stagger payment of the initial franchise fee if it is a large amount.

There are two guiding principles concerning the initial fee.  The first is that it should not contain a profit element for the franchisor.  The second is that the initial fee should not exceed 10% of the total investment which the franchisee will have to make.   Ultimately, the  amount  which can be charged by way of an initial fee will depend on  the reputation  of  the franchisor, the profitability of his franchise,  the  term granted, whether it contains an exclusive area etc.

Term

The term of the agreement is [       ] years from the date of this Agreement.

Note

Most franchises are for an initial term of 5 years with a significant number of franchises being granted for 10 years.

Rights of Renewal

(a) The Franchisee may renew the Agreement for a further term unless he has committed a material breach or has not substantially performed the terms of the Agreement.
(b) Prior to renewal the Franchisee may be required to enter into the then current form of agreement and may have to refurbish the Premises.

Note

It  is important for a franchisee to ensure that he may renew the franchise at the  end  of  the initial term and that the renewal can be  exercised  without further  payment.   The right to renew should not be lost merely for minor breaches of the franchise agreement.

Franchisor’s Initial Obligations

The Franchisor will on execution provide the following:-

(a) Advice on finding premises;
(b) Advice on alterations to and fixtures and fittings in the Premises;
(c) General advice on how to set up the franchise;
(d) Such equipment, stock, fixtures and fittings as are listed in the Schedule;
(e) A PR launch;
(f) A copy on loan of the Operations Manual;
(g) An initial training programme for the Franchisee.

Note

The purpose of the franchisor’s initial obligations is to put the franchisee (who probably has no knowledge of the business to be franchised) in a position to operate the franchised business.  If a franchisee  “fails”  the initial training  the franchisor usually reserves to itself the right to terminate the agreement and return  to the franchisee payments which have been made  less  all expenses incurred by the franchisor.

Franchisor’s Continuing Obligations

(a) Provide the Franchisee with know how, advice and guidance relating to the Business;
(b) Supply products to the Franchisee;
(c) Supply stationery when required;
(d) At cost, train the Franchisee’s personnel;
(e) Organise an annual conference for Franchisees.

Note

It is advisable to set out in some detail the obligations accepted by the franchisor.   Franchisees will find it unacceptable to enter into an agreement where the obligations which they will have to accept are extensive but those accepted by the franchisor are limited.

Franchisee’s Obligations

The Franchisee shall:-

(a) Refurbish and equip the Premises as required by the Franchisor.
(b) Only use stationery, invoices, and products which are supplied by the Franchisor.
(c) Operate the Business in accordance with the Operations Manual.
(d) Use only signs and packaging in connection with the Business as have been approved by the Franchisor.
(e) Maintain the Premises to the highest standards and not carry out any alterations without the Franchisor’s consent.
(f) Use his best endeavours to promote and extend the Business.
(g) Operate the Business during hours specified by the Franchisor.
(h) Ensure that staff are well dressed, clean and polite.
(i) Not employ as a manager any person who has not completed the Franchisor’s training course and been approved by the Franchisor.
(j) At  the request of the Franchisor provide potential  franchisees with information as reasonably requested.

Note

This clause contains only a short selection of those provisions which may be appropriate to be imposed on a franchisee.

It is important to stress that obligations and restrictions are being imposed on all franchisees for the protection and benefit of franchisees generally because a franchisee who does not comply with the franchisor’s system may have a detrimental effect on the entire franchise network.

Training

The Franchisor shall provide training for the:-
- Individuals in accordance with the details set out in the Schedule.
- Franchisee’s employees.

Note

It is desirable to set out the training obligations in some detail.   The initial  training  is  usually provided free of charge, but  further  training during  the  term  of  the  franchise  is  usually  provided  subject  to  the reimbursement of the franchisor’s standard charge.

Management Charge

(a) The Franchisee shall pay a Management Charge of [        ]% of gross turnover  on monthly sales.
(b) The Management Charge is to be paid within two weeks of the end of every month with interest of 15% per annum on late payments.

Note

Ideally, from the franchisor’s point of view the Management or Service Charge should be paid weekly since this will improve the franchisor’s cash flow and enable the franchisor to establish at an early stage a franchisee’s ability to pay the Management Charges.  A franchisee will usually wish to establish the level of any mark up on the goods/services supplied by the franchisor to ensure that a franchisor is not charging a high mark up and Management Charge.

Accounting Records

The Franchisee shall:-

(a) Maintain records of gross turnover and submit a statement of gross turnover with the Management Charge in the form specified in the Operations Manual.
(b) Maintain all records needed to verify the gross turnover for not less than 6 years.
(c) Allow representatives of the Franchisor to enter the Premises to investigate the Franchisee’s records.
(d) Supply to the Franchisor copies of all VAT returns.

Note

The extent of the accounting records to be provided to the franchisor will depend on whether the franchisor charges a continuing fee.  VAT returns are usually required to be provided because they enable the franchisor to check the financial information provided by the franchisee.

Advertising

(a) The Franchisee shall spend a minimum of £[       ] per year on advertising in the Franchisee’s territory.
(b) All advertising is to be approved by the Franchisor.
(c) The Franchisor shall spend not less than £[      ] per year on national advertising.

Note

Most  franchise  agreements  require  franchisees to  contribute  to  national advertising  by  way of an advertising levy to be held by the franchisor in  a separate fund so as to ensure that it can only be used for advertising.

Insurance

(a) The Franchisee shall take out with a reputable insurance company all such insurance cover relating to the Business as the Franchisor shall reasonably require.
(b) The Franchisee shall ensure that the Franchisor’s interest is noted on policies and/or furnish to the Franchisor copies of policies and evidence of payment of premiums.

Note

Franchisors are usually concerned to ensure that their franchisees are adequately insured because of the possibility of claims being made against the franchisor for the acts of the franchisee.

Telephones

Note

If  the  use  of telephones is an important part of  the  franchised  business because,  for  instance,  the  business is advertised  through Yellow  Pages, consideration should be given to the franchisor subscribing to the telephone number and  being reimbursed  telephone  charges  by  the  franchisee  or, alternatively,  obtaining from the franchisee an undated but signed instruction to transfer the franchisee’s telephone numbers to the franchisor  who  would only use the instruction on termination of the franchise agreement.

Sale of Business

(a) The Franchisee shall have no right to transfer the franchise without the Franchisor’s consent.
(b) The Franchisor shall consent to a transfer provided that:-
     (i) the purchaser meets the Franchisor’s minimum standards
     (ii) payment of the costs of investigation and training are made
     (iii) there are no subsisting breaches of this Agreement
(c) The Franchisor shall have the option to match any offer for the Business which is made to the Franchisee.

Note

Special provisions will have to be inserted if the franchisee is a limited liability company to ensure that the franchise cannot be transferred simply by transferring shares.

Non-Competition

Neither the Franchisee nor the Individuals will during the term of the franchise:-

(i) carry on any other business
(ii) entice employees from the Franchisor or other franchisees
(iii) use or disclose confidential information for any purpose other than  a purpose set out in the Agreement.

Death of Individual

(a) The Franchisor will provide a manager for a period of three months following the death or incapacity of the last of the Individuals to die, on payment of the Franchisor’s then current costs and expenses.
(b) Within the three months period the Individual’s personal representatives or beneficiaries must either:-
     (i) Qualify as a Franchisee by training etc or
     (ii) Notify the Franchisor of their desire to sell the franchise,
failing which the Franchisor may terminate this Agreement

Note

A  franchisee’s  family  or personal representatives may wish  the  franchised business  to  continue  to  operate because this increases the  value  of  the business  should  it have to be sold.  Further, a franchisor may not wish a franchise outlet to cease trading because of adverse publicity that would result.

Provisions may need to be inserted to deal with incapacity as well as death.

Termination

The Franchisor may terminate this Agreement if the Franchisee:-

(a) fails to commence business within three months of execution of the Agreement
(b) is in breach of [any of] the terms of the Agreement
(c) persistently defaults in payment of any amounts due to the Franchisor
(d) is found to have supplied materially false or misleading information in or supporting the franchise application
(e) goes into liquidation/bankruptcy or is insolvent

Consequences of Termination

The Franchisee:

(a) must cease use of the Franchisor’s trade name and trade marks and must not thereafter hold itself out as being a franchisee of the Franchisor
(b) must pay to the Franchisor all sums payable to the Franchisor whether  or not then due
(c) shall return to the Franchisor all manuals literature promotional material letter  heads   invoices or  anything else which bears the trade  name of or indicates any association with the Franchisor
(d) shall provide the Franchisor with a list of all customers and  potential customers of which it is aware
(e) shall not make use of or disclose any confidential information relating to the system or the franchised business
(f) shall not compete with the Franchisor.

Individuals’ Guarantee

The Individuals shall indemnify the Franchisor against any breaches of the Agreement by the Franchisee.

Representations

The Franchisee and the Individuals confirm that they have not relied on any representation or warranties from the Franchisor in entering into this Agreement.