You can reap a range of significant benefits when starting a business, but this also comes with a degree of financial risk. Instead of opening a business on your own, you could enter a franchise agreement. Here you (the franchisee) sign a contract with an established firm (the franchisor) to provide goods and services under their brand. It is essential that you perform extensive research, before entering a franchise agreement. Turner Little answers five frequently asked questions on franchise agreements.
What are the types of franchise agreements?
There are several types of franchise agreement, which typically run for five years, with options to renew twice. The most commonly used is the “business format franchise,” where the franchisor grants licenses allowing you to run your firm under their brand, in exchange for fees and regular payments. The franchisor will supply you with assistance and training and product quality control services.
There are a number of other arrangements that are sometimes referred to as franchises. This includes licenses, agency arrangements, dealerships and distributorships. A “tied house” arrangement between a brewery and a pub, for instance, is often called a “first generation franchise.” You will always be required to sign an agreement, so you and the franchisor know your rights and obligations.
What do franchise contracts include?
Your franchise contract should include details on terms, fees, responsibilities, legal relationships, provisions for dispute resolution and agreement termination. Remember that franchisors will rarely be willing to re-negotiate on contract terms, especially if you are signing up to an existing franchise.
It is important to note that franchisors will frame contracts to favour themselves. For example, they may obligate you to purchase all equipment from them. While the agreement will favour the franchisor, it should not be unfair to you e.g. charge you excessive fees. Ensure your franchisor adheres to The British Franchise Association’s Code of Ethical Conduct, so both parties get a fair agreement.
What are franchise networks?
You can also join a franchise network. With this option, it is vital that you sign a comprehensive agreement, to safeguard your interests. The agreement should detail your obligations e.g. operating the firm according to the franchisor’s instructions, carefully. Under this arrangement, you will be liable for your own expenses e.g. taxes, wages, legal fees and business rates.
What if you break your contract terms?
In this case, the franchisor will probably have the right to terminate the contract. You could be required to pay fees and costs, including those incurred via closing the company. If you fail to pay fees to the franchisor on termination or if you cause them to incur losses e.g. by damaging the reputation of their brand, the franchisor could issue a legal claim against you. If you lose this case, you could be liable to pay your own and your franchisor’s legal costs, plus damages and you would lose the firm.
You will also risk legal action if you simply stop paying your fees to the franchisor, or cause them to lose revenue. In these cases, they are likely to terminate your contract with immediate effect, so you would have to cease trading straight away. Under the agreement, your franchisor will usually have the right to enter your premises and enforce the terms. You may also have to adhere to any restrictions on running a competitor company, preventing you from defending yourself against any legal action.
What if the franchisor’s claims were untrue?
After signing an agreement, you may find that claims made by the franchisor were untrue. You would need to rely upon UK contract law here, as it is unlikely that your agreement will include any provisions allowing you to terminate the contract for false representations, but this option is rarely advisable. You could gain damages for any losses you incurred due to untrue claims, but there are significant costs and risks involved, which is why it is vital to do extensive research before signing an agreement.
Seeking legal advice
It can prove beneficial to sign a franchise agreement, but this option also comes with significant risks. This is why it is crucial that you seek legal advice before entering a franchise agreement, in order to safeguard your interests and capital. As part of our corporate services, Turner Little provides a business and legal advice service retainer, helping you make informed business decisions.
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.