Key elements of a Franchise Agreement
- AuthorAndrea Smith
The franchise industry is a booming one, worth over £10 billion. It offers a fantastic revenue and business model for franchisors and franchisees alike, with each benefitting from the others’ success. However, in order for the business venture to thrive and prosper it is crucial that the parties to a franchise agreement understand, can fulfil and deliver upon the provisions contained in it. The franchise agreement is pivotal and governs the contractual relationship between the parties.
A franchise agreement is made up of many elements. Three of the fundamental aspects that should be included are:
- rights and obligations of the parties
- marketing and intellectual property rights (IPRs)
- termination provisions.
Rights and Obligations
These clauses lay out the foundation of the relationship between the franchisor and franchisee. They grant the rights needed by the franchisee to develop and operate the business and the support given by the franchisor, essential to the operation of the franchise. It is in the best interests of both parties for the franchise to be a success, and it is these clauses together with the operating manual that make the franchise model function.
Marketing and IPRs
A franchisor will have invested considerable amounts in their brand, reputation and development of their goodwill. The franchisee relies on this and the ability to use the branding to make their franchise fruitful. At the same time, it is important that the franchisor protects their branding and IPRs and it is these clauses that will facilitate this delicate balance and ensure uniformity across the Franchise network.
Unfortunately the franchise relationship is not always successful. Whether this is due to poor training, an overestimate of potential income, a weak business model or a lack of performance and breaches on the part of the franchisee. A relationship can also finish on a positive note but, however it happens, it is important that your agreement addresses how and when the relationship formally ends. As equally important, it should address what happens next. Franchisors owe it to their brand and the remaining franchisees to protect the business, usually through what are known as post-termination covenants. It is critical that franchisees understand these so that they can recognise how they can personally move forward at the end of the relationship. If these provisions are drawn up incorrectly, they can be found unenforceable by the courts. Correct drafting and advice is imperative. These are but a few aspects of what should be addressed in franchise agreement. To make it work, every aspect should be drawn up correctly, clearly and concisely.