What are the key elements of a franchise agreement?

Franchising can be an alluring prospect for many business owners who can benefit from the existing success of a franchise brand. Franchising allows the owner of the original business to retain ownership and control of their brand whilst allowing a franchisee to use the franchisor's brand, supply chain, and business model, as well as benefit from any marketing.

There aren't any specific laws pertaining to franchising in the UK. As a result, the franchise agreement signed by the franchisor and the franchisee is critical.

Due to the lack of franchising laws in the UK, there doesn't exist a "catch-all" template that all agreements can be drawn up using. Each agreement is unique and, as a result, must be carefully crafted, tailoring it to the specific needs and wants of the franchisor and franchisee. There are several key elements that a good franchise agreement should contain to protect both the franchisor and the franchisee best. Here is a breakdown of some of those key elements:

Identity

First and foremost, all franchise agreements should identify the franchisor and the franchisee. This identification may seem obvious, and arguably that's because it is, but it is still an essential aspect of any agreement and should not be omitted. Failure to correctly identify those involved in an agreement can lead to a myriad of legal issues down the line. It could even result in the entire agreement being deemed unenforceable.

Duration and renewal

The next element that should be present in any franchise agreement is the duration of the contract. Most franchise agreements have an initial course of five years. However, in the UK, there is no maximum permitted term for a franchise agreement. It is therefore vital to have a precise expiry date written into the contract, as neither party should assume it will run for the generally used five-year term.

Even if one party has verbally communicated their desired term length to the other, it is paramount you have that agreed-upon timeframe written into the agreement to make it enforceable.

Writing a fixed duration into a franchise agreement does not necessarily mean the partnership between franchisor and franchisee will end on that date, as a renewal clause can also be written into the agreement. This clause would give the franchisee the right to renew the deal, so it runs again for another agreed-upon duration.

Typically, if a franchise agreement has a five-year initial term, it can be renewed for a further five years. However, alternative renewal terms can be agreed upon, provided they are reasonable. The British Franchise Association advises that in cases of five-year franchise agreements, the franchisee be given the right to renew twice, for a fifteen-year term altogether.

Fees

Fees are an integral part of any franchise agreement. For Franchisors, detailing fees in their franchise agreement ensures they will see a return from the licensing of their brand. Whereas for franchisees, proper detailing of fees will help them understand how much it will cost to enter into the agreement and, therefore, how much money their franchise will need to turnover to make a profit.

Most franchise agreements will involve an initial fee to be paid to the franchisor. The size of this fee can vary wildly depending on the business being franchised. Still, it is important the fee is proportionate to the potential returns of the enterprise being franchised. For example, a £5000 initial franchising fee for a business expected to turnover an amount in the millions annually does not represent good value for the franchisor. Conversely, an initial franchising fee that is too high would be of poor value for the franchisee.

In addition to initial fees, many franchise agreements include royalty fees. These fees can take several forms, so you must read your franchise agreement carefully to understand how your royalty fees are structured. Royalty fees can be calculated as a fixed percentage of either profit or turnover. This is important to note for franchisees; if royalty fees are based purely on turnover a franchisee may have to pay out to the franchisor even if the business is not profitable.

Some franchise agreements will not contain royalty fees, as the franchisor may instead make money from the franchisee by selling equipment and supplies to the franchisee at a marked-up cost. Furthermore, if the service offered by the franchise is specialised enough, the franchisor may provide training to the franchisee and their staff, which they will be able to charge a fee for.

One more fee that a franchise agreement could contain is a sell-on fee. It may be the case that the franchisee wants to sell the business for a new franchisee to take over before the end of their term. Many franchisors will include a clause in their franchise agreements entitling them to a percentage of the sale fee or a pre-determined amount in the event of a sale.

Like many of the fees mentioned already, the franchisee must pay close attention to any sell-on clauses so that they do not get caught out if and when they sell the business.

Marketing

It is necessary to establish how the business is to be marketed; this will allow the franchisor to protect their brand's image by installing dos and don'ts for any marketing campaign. It will also communicate to the franchisee how much of the marketing workload will fall on their shoulders.

Some franchises will market themselves nationwide, meaning that individual franchisees have very little marketing to do. Some others may dictate to their franchisees that they are responsible for marketing their business; this is important to understand as it will affect the costs associated with running a franchise, both as a franchisor and as a franchisee.

Intellectual property rights

Intellectual Property Rights (IPRs) are also likely to be addressed by a franchise agreement. These IPRs are of incredible value to the franchisor as they protect their brand's:

• Trademarks
• Patents
• Copyrights
• Promotional materials
• Trade secrets
• Confidential information
• Domain names
• Database rights, and
• Moral rights

Although a franchising endeavour should be mutually beneficial, it is imperative that the franchisor protects these IPRs from misuse. The franchisor has a general duty to ensure that its brand's reputation is not damaged and that these assets are managed and appropriately licensed to franchisees. The franchise agreement should establish clear rules that detail permitted uses of IPRs, and consequences of violations of those IPRs.

Termination

A robust franchise agreement will include provisions for the termination of the agreement. Termination can be initiated by either party, depending on certain circumstances. A franchisor may seek termination of a franchise agreement if the terms of the said agreement have been breached. On the other hand, a lack of profits, or a belief that the business model is not as strong as they had once thought, might cause a franchisee to pursue termination of their franchise agreement.

Franchise agreements can also be terminated mutually. Often this will occur after the initially agreed term of the agreement has passed. In this event, specific clauses will be imposed upon the franchisee for a certain period (often ranging from one to five years) after the termination of the agreement.

These clauses are known as restrictive covenants. Essentially, they restrict the franchisee from using the knowledge and expertise they may have gained while part of a franchise to open a competing business. These restrictive covenants must be worded very carefully, as from a franchisor's perspective, they have a duty to protect their brand and other franchises. If the restrictive covenants in a franchise agreement are too ambiguous or too extreme, then there is a chance a judge may rule them as unenforceable, which could be damaging for the franchise.

Contact our franchise solicitors

In order to accommodate the various clauses and terms detailed above, franchise agreements are often incredibly long, dense, documents. Our experienced franchise solicitors can help draft franchise agreements, assist with sales, negotiate on behalf of franchisors and franchisees, and offer invaluable advice.

Furthermore, our franchise solicitors can also advise on other key areas you will need as a franchisee, including dispute resolution, employment law and commercial property.

We have offices in Brighton, Eastbourne, Hastings, London, Uckfield, and Ulverston, and work with franchises across the country.

We're renowned for our commercial acumen and will support your business every step of the way.