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Franchise agreements – Forewarned is forearmed

The decision to buy a franchise can be both a daunting and exciting experience. A prospective Franchisee should not feel pressurised into making a quick decision, but should take the time to evaluate the franchise business by asking searching questions of the Franchisor, to understand what will be involved from both a practical day to day operational level, to the legal implications of committing to the franchise.

What is a franchise agreement?

The franchise agreement is the document that sets out the legal basis of the contractual relationship between the Franchisor and the Franchisee. It is important for the prospective Franchisee to take advice from a lawyer who has experience of franchising, to obtain a proper explanation of the nature of the legal obligations and restrictions that they will be bound by, once the agreement is signed.

Can I make amendments to my franchise agreement?

The Franchisor is unlikely to accept amendments to the agreement; the strength of the network is that all franchisees operate on uniform terms and a Franchisor who happily negotiates different arrangements with its franchisees is one to wary of.

A franchise agreement is unlike other commercial agreements. It is important to appreciate that the grant of a franchise is not an agreement between two parties of equal bargaining strength.

The franchise ‘System’

The Franchisor will have developed a successful method of operating its business which it has tested and proved over time. In granting a franchise the Franchisor authorises the Franchisee to set up an independent business which the Franchisee agrees to operate in accordance with the Franchisor’s business model; often referred to as the “System” or Method”.

The System being franchised contains valuable confidential information and business knowhow, which the Franchisor seeks to protect by provisions in the franchise agreement, that allow the Franchisor to regulate the way in which the Franchisee runs its franchise business.

Are you willing to stick to the franchisor’s ‘System’?

Accepting that a franchise requires strict observance of the Franchisor’s System can be a difficult concept for a prospective Franchisee to accept, after all the Franchisee is financially responsible for the way the business operates and has paid a significant fee for the grant of rights. Some Franchisees regret their decision because once the franchise agreement has been signed and the training completed the reality of the way in which the Franchisor controls ‘their’ business dawns.

Why it is vital to seek specialist franchise legal advice

This neatly brings us back to the starting point that for a prospective Franchisee to assume that it knows how the relationship will operate without experienced advice can prove costly. The most successful Franchisees ensure that they know exactly what will be required and accept the parameters in which they are required to operate the franchise from the outset.

(This article first appeared in Business Franchise Magazine in September 2014)

If you require any advice on franchise legal matters please contact our Franchising Team.

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