Franchise agreement

About this document

Franchising in retail is not as common as in food and service businesses. However, there are situations where it is an excellent method of growing a business, particularly if the customer experience of buying the product is tied to the customer's perception of the product itself.

Franchising retail outlets is also common where:

• the retailer uses the intellectual property of the manufacturer (for example, the retailer only sells the products of the franchisor, and does so from a shop branded with its name)

• the retail experience is important in maintaining the brand (where buying the good becomes an event in itself)

• the product requires customisation at the point of sale (for example, custom fitting of technical clothing)

• the product requires regular servicing or other after sales support that would be impractical for the manufacturer or an agent to carry out, yet requires specialist product knowledge

• the manufacturer needs to retain control over aspects of the retail operation (such as having access to customer information)

This agreement covers an enormous number of issues important to franchising. We believe it is comprehensive enough to be used by the largest chains.

For smaller businesses, it should be an ideal basis from which to craft an agreement that not only protects the rights of the manufacturer, but also impress prospective franchisees.

We would expect this agreement to be used by a solicitor or other advisor. However, because the key to drawing a good agreement relies on knowing the nuts and bolts of how the business works (rather than knowing complicated law), an owner could also use it with ease. Use of plain English makes every sentence clear.

Should you be buying an agreement from an on-line retailer?

The advice from the largest association of franchisors in the UK, the British Franchising Association (the bfa) is that you shouldn’t use an advisor who isn’t a paid subscriber to their association. That advice extends to agreements bought from online retailers.

This isn’t impartial advice. The trade association is comprised of experienced and knowledgeable people, but it is a private company, commercially operated to promote and to protect the financial interests of its subscribers.

There is no additional qualification required to practice franchise law, just as there isn’t to being able to draw a lease. Commercial experience is the important quality to seek.

When it comes to selecting an agreement from an online retailer, we suggest that you look at templates from several different suppliers in order to evaluate which one is most comprehensive and suits you best.

Templates are not expensive compared to the cost of a solicitor's time, and the benefit to your business of getting your agreement right is enormous. Bear in mind that a short agreement, regardless of where it is bought, is unlikely to protect your business sufficiently, not because the law relating to franchising is overwhelmingly complex, but rather because the practical considerations of how the franchise will work require more than a few pages to record.

The bfa promotes ethical franchising. We agree with this, not as a matter of philosophy but because a successful franchisor is one who helps his franchisees to create profitable businesses while he expands his own. Your agreement has to form the basis of a sound and profitable deal for both sides.

The law in this document

There are no specific laws or regulation for franchising. Your agreement is governed by common law. That gives you great freedom in structuring the arrangement in the best way for you and your franchisees. You can set the rules as you like. However, your prospective franchisees and their advisors will look carefully at your proposed agreement.

That means that the agreement becomes very important in recording the rights and obligations of both sides. It should reflect accurately and in detail the terms agreed. The more comprehensive it is, the less likely there are to be misunderstandings and disputes later on.

In research on franchises, you may find mention of European law set out in the Treaty on the Functioning of the European Union by Regulation 330/2010 and Vertical Agreements Block Exemption Rules. The law was drawn to catch pyramid selling and most vertical agreements such as franchises are excluded from it. Provided that this agreement is used for a real franchise operation, this law should not be relevant.

Businesses for which this document would be suitable

This agreement has been drawn for situations where:

• the franchisee predominantly sells goods, possibly with additional services

• end customers are businesses or consumers

Examples of businesses that could use this agreement include those:

• where a retailer trades under the name of the franchisor, and the latter wishes to retain control over the retail experience (for example, the shop layout or how a customer is served) in order to protect the brand and/or to promote a similar customer experience across all retail outlets

  This is a common model for many high street retailers, whether or not all the products are made by a sole manufacturer. Examples include French patisserie chains to sports clothing shops.

  This agreement could be used where the goods will be sold in a concession. The concession could be run by a franchisee independent to the rest of the shop (such as in a department store) or by the owner of the shop as a separate business unit (allowing the owner to be a specialist stockist while offering the products of other companies as well).

• where the franchisor wishes to own, or have access to, the intellectual property of the retailer (for example, access to customer information)

• where an additional service is required to bring the product into use or maintain it, and the franchisor is unable to provide this service himself

  An example of a business that requires the product to be customised is specialist sports equipment (such as ski boots), where it would be impractical for the customer to visit the manufacturer to be fitted.

  An example of a business that requires the product to be serviced would be a home cleaning robot retailer, where the product is unusual and sophisticated and requires maintenance by a specialist.

The agreement is comprehensive enough to be used by a business of any size, but we assume that the business will be small or medium sized, perhaps with several established branches already. The franchisor may be new to franchising, or may be looking to expand.

The territory can be of any size from part of a town to a continent. Generally, it is more advantageous to keep the area small and grant licenses to operate in additional areas to the same franchisee later. This agreement can be used to grant territory outside the UK.

The agreement does not cover ownership and lease of property (premises). The agreement assumes that the franchisee will own or let the premises outside of this agreement (you may need a business lease agreement in addition) either from the franchisor or someone else if required.

Note, we also sell a franchise agreement for a service business where a service is sold rather than goods. The differences between the two are relatively small. If you sell services and goods, then either document should be a good basis for your final agreement.

Features and benefits

We have given the buyer of this document a large degree of control over what the franchisor will give and what the franchisee will do in return. We have included the usual provisions such as:

• Use of trademarks and intellectual property

• Provision of marketing and marketing materials

• Development of public relations and promotional campaigns

• Training and support

• Sourcing materials

Protection of his investment is likely to be very important to a franchisee. The agreement covers this in detail, from renewal rights, transfer with pre-emption to intellectual property that the franchisee might create. These should provide fair terms that incentivise the franchisee and allow him to benefit from having built up his franchise without relinquishing too many rights.

Contents

This is one of the longest Net Lawman documents with 31 pages (excluding guidance). The contents include the following paragraphs:

• Warranties that the franchisee is able to take on the franchise
• Grant of franchise
• Obligations of the franchisor to the franchisee: both initially and on-going
• Fees and payment terms
• Rights to renewal
• Data Protection Act compliance
• Franchisee’s undertakings
• Transfer terms: including pre-emption rights for the franchisor to acquire the business
• Terms relating to the corporate structure of the franchisee
• Termination: rights to terminate the agreement and process for termination
• Insurance
• Risk and retention of title
• Use of subcontractors
• Intellectual property rights
• Confidentiality
• Limitation of liability
• Publicity
• Indemnity
• Dispute resolution
• Other legal paragraphs to protect your interests