The Franchise Agreement

A franchise agreement should achieve three fundamental objectives

FIRST – Given the absence of specific franchise legislation, it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon.

SECOND – It should seek to protect for the benefit both of the franchisor and the franchisee, the franchisor's intellectual property.

THIRD – It should clearly set out the rules to be observed by the parties

1. The Terms

As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee and the relationship between them. In this respect the franchise agreement can be said to form the 'engine room' of the whole transaction. If difficulties should arise between the franchisor and the franchisee they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.

What, then, should one look for in a franchise agreement?

A franchisee will look for promises:

• To train the franchisee and his staff
• To supply goods and / or services
• To be responsible for advertising, marketing and promotions
• To assist the franchisee to locate and acquire property and have it fitted out and converted into a franchised outlet. (Similar considerations apply with regard to the acquisition of vehicles, fitting them out, equipping the franchisee etc.)
• To assist the franchisee to set up in business
• To improve, enhance and develop the business system
• To provide certain support management and possibly accounting services

Franchisors will be anxious to ensure that the franchise agreement clearly sets out the obligations of the franchisee. A franchisor will therefore wish to:

• Monitor the performance of the franchisee
• Protect himself from unfair competition
• Protect his intellectual property
• Impose obligations and restrictions on the franchisee with regard to the exercise of the rights granted by him to the franchisee

2. The Intellectual Property

These are in the nature of:

• Trade Name
• Goodwill
• Trade Marks
• Confidential Information and know-how
• Copyright

Unless the franchise agreement contains sufficient safeguards to protect the franchisors intellectual property rights, the franchisor may find that he is unable to prevent infringement of his rights by a third party or an ex-franchisee.

Franchisors should be aware that it is not only in the interests of the franchisor that these rights be protected. Franchisees are equally concerned to ensure that the franchisor had done everything that is reasonably possible for him to protect the intellectual property rights in question. Many franchisees purchase a particular franchise because of the high profile a franchise enjoys in the market place. In many cases, a franchisee has the choice of which franchise to purchase in the same market sector and one of the reasons why a franchisee will have chosen a particular franchise is because of its strong brand image. It follows therefore that the franchisee will be anxious to ensure that in the event of infringement, the franchisor has taken sufficient steps to safeguard his ownership in his intellectual property rights so that he can stop infringement and thereby protect the reputation of that brand name both for himself and for his franchise network. If the contract is weak on this point, franchisees will not consider that particular franchise to be a sound investment proposition because the franchisor will be limited in what he can do to prevent a 'copy cat' operation from being set up in direct unfair competition with a franchisee.

Brand names and trademarks are becoming increasingly important to business; they can increase the asset value of a company and therefore need to be adequately protected. The franchise agreement should therefore not only grant relevant rights to the franchisee and reserve rights for the franchisor, but should also contain mechanisms necessary for protecting the franchisors intellectual rights from infringement.

3. The Rules

All franchisees should be treated as a family and, as such, there should be no room for favourites. This means that the franchise agreement should be in a standard form with all prospective franchisees being offered the same terms with no special deals being done. If a franchise agreement is to be non-negotiable then it is important, from the franchisees point of view, that is well balanced in terms of rights and obligations of the parties and takes into consideration the franchisees concerns also. Again, in the absence of legislation or regulation, which tells the franchisor and franchisee what to do and how to behave, and given that franchisors and franchisees perceive the franchise relationship to be a long term one, it is important that the contract spells out very clearly what is expected and of each party to the contract.

The franchise agreement should therefore clearly:

• Specify in detail the duties and obligations both of the franchisor and of the franchisee
• State the grounds upon which the franchisor will seek to terminate the franchise agreement
• Deal with the payment of franchise fees and the timing of those payments
• Set out the consequences of such termination

Some thought has to be given to the franchisees and their objectives and provision should therefore be made in the franchise agreement to deal with what is to happen should the franchisee die or become permanently incapacitated.

It is also advisable to deal with the question of what is to happen if a franchisee wishes to sell his business during the term of his franchise agreement. Here, as in other matters, a balance has to be struck between the need of the franchisee to realise his investment as and when he wants to and the requirement of the franchisor to approve those coming into the franchise network and to prevent those leaving the network (for whatever reason) from continuing to use the franchisors trade secrets and competing unfairly.

The franchise transaction is complex and the franchise agreement must respect that complexity. Experience has shown that those franchisors who take the matter of the franchise contract lightly pay dearly for their mistake. To the franchisee, the franchise contract represents an investment. His business depends upon it to the extent that his business may disappear should it terminate. For the franchisor, the franchise agreement is an income producing asset which will ultimately have a place on his balance sheet. If for any reason the franchise contract turns out to be defective, the cost to the franchisor can be the loss of his whole network (given that the franchise agreement is in a standard form). Although it may be tempting for both franchisor and franchisee to rely on goodwill, ultimately it is only the contract that matters.

Whatever the size or reputation of the franchisor, prospective franchisees will always look to the quality of the franchise agreement because they know that there may be a change of policy within the franchisor company or that the people running the franchise operation may change. They know that at the end of the day, all they can rely upon will be whatever rig