Due to the complex nature of UK franchising you should take advice from an experienced franchise solicitor. Most franchise contracts appear to favour the franchisor so the expertise of a solicitor will help analyse areas such as restrictive clauses, renewal fees and terms, and what actions to take if there is a dispute between the franchisor and franchisee.

Why not check out our list of bfa affiliated solicitors in your area. Bearing in mind that a franchise contract is long-term, the money you spend on expert solicitors' advice could be one of the best investments you make.

The Legal Stages

There are various legal stages that you will have to go through before you buy a franchise.

1. Sign a confidentiality agreement if confidential information is being provided.
2. Enter into a deposit agreement, which will require payment to be made to the franchisor. Do take care as the payment may be non-refundable.
3. Obtain a copy of the franchise agreement.
4. Obtain legal advice on the agreement.
5. Obtain legal advice on premises if franchise is premises based.
6. Sign the franchise agreement and make payment as required in the agreement

The Franchise Agreement

In order to become a franchisee you will have to enter into a legal agreement with the franchisor, known as the franchise agreement.

What is 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 and the franchisors intellectual property.

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

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 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 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 wish to:

• Monitor the performance of the franchisee
• Protect them 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

The Intellectual Property

These are in the nature of:

• Trade Name
• Goodwill
• Methods of Production
• Confidential Information and know-how
• Copyright

Trade Marks and Service Marks

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

Franchisors should be aware that it is not only 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.

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 it 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

Franchisors should be aware that under English law if an ambiguity arises in a franchise agreement the Courts will tend to interpret the ambiguity in favour of the franchisee. They reason that, as the draftsman of the contract, it is the franchisors responsibility to make sure that he/she gets it right and therefore they will not allow him/her to benefit from any ambiguity which may well arise as a result of unclear drafting.

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/her investment as and when he/she 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/her 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/her 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/her whole franchise 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 rights are written into that contract.

Once a franchise agreement has been signed, both parties will be bound by it. It can be a double-edged sword and if the franchisor has got it wrong he will have to pay the price. A final word of caution - remember that generally speaking, there is still no law against making a bad bargain!

© Manzoor G. K. Ishani - All rights reserved May 1999

Manzoor G. K. Ishani is a partner and head of the franchise department of Sherrards (solicitors). He is a former member of the Legal Committee of the British Franchise Association and co-author of 'Franchising in the UK', 'Franchising in Europe' and 'Franchising in Canada". Sherrards can be contacted on 01727 832 830.

What happens if it all goes wrong?

Termination

A franchise relationship, as with a marriage, can come to an end. You need to therefore look at:

How can the two parties withdraw from a relationship in which they have freely shared each other's business plans and secrets with a degree of fairness?

How can the franchisor ensure that the departing franchisee does not become a competitor to himself and the franchisees remaining in the system?

A franchise relationship is one, which should be capable of subsisting over a long period of time. Nevertheless there will be occasions when it comes to an end. This can arise in a number of ways:

• There may be a breach of the franchise agreement by the franchisor.
• There may be a breach of the franchise agreement by the franchisee. Usually the agreement will provide for the franchisee to be given the opportunity to remedy his breach before the franchisor will terminate.

Where, at the end of an agreement for a fixed term, the franchisee, who may hold a right of renewal, may choose not to exercise that right. The franchisee may sell the business and the purchaser may be granted a new franchise agreement if that is permitted.

The interests of the franchisor and franchisee on termination are similar, although viewed from a different angle. Each is concerned to safeguard his commercial and financial interests.

The franchisor will be concerned to safeguard his commercial interests so that he can appoint a replacement franchisee. On the other hand, the franchisee will be concerned to recover as much as he can financially, and to minimise the extent to which his future business activities will be restricted by the fact that he was a franchisee.

The Consequences

Most well-drafted franchise contracts will spell out clearly what is to happen upon the termination of a franchise contract for whatever reason.

The post-termination provisions of a franchise contract can usually be broken down into two categories.

The first category will deal with those aspects which are concerned with the severance of the relationship and the protection of the franchisors name and goodwill.

The second category will deal with the method by which the franchisor will seek to protect his franchise's know-how, trade secrets, and business methods so as to prevent the departing franchisee from unfairly making use of them in order to compete with the franchisor and the other franchisees.

Goodwill

The objectives of the first category are usually secured in the following way:

The franchisor will be anxious to ensure that customer contact and continuity of service is maintained with the customers of the departing franchisee. In this respect, a well-drafted franchise contract will provide for the transfer of existing contracts between the franchisee and his customers to the franchisor together with any necessary financial adjustments.

To complete the change of the visible public image reflecting the franchisors name and goodwill, the franchisee will be required to take certain steps such as:

• Make application to the appropriate authorities to cancel any trade mark licence, which may be recorded with them relating to the use by the franchisee of the franchisor's trademarks or service marks
• When appropriate, change the fascia, décor and shopfitting of premises and the livery of any vehicles
• Return all advertising, packaging, marketing and promotional material associated with the franchise
• Cease to use stationary, literature, etc. bearing the franchisors trademarks and service marks, trade names and other reference to the franchise
• Return operations manuals
• Cease to use the franchisors system
• Cease to use the franchisors copyright material

Protection

The objectives of the second category are usually secured in the following way:

The franchise contract will contain promises on the part of the franchisee which are commonly known as convents in restraint of trade and non-competition convents. For example, it is usual for the franchisor to extract a promise from the franchisee in the franchise contract that the franchisee will not compete with the franchisor, or any other franchisees within a certain area and stated period after termination.

The franchisor will be anxious to ensure that the franchisee does not disclose any confidential information imparted to him while he is not used to compete with the franchisor, or any of his franchisees.

Restraints

Difficulties arise in relation to the imposition of restraints on the future business activities of the franchisee and the extent to which they may become competitive with the business of the franchisor and his other franchisees.

It should be appreciated that to some extent each franchisee is concerned that a fellow franchisee should not breakaway and engage in unfair competition, making use of the knowledge acquired as a former franchisee.

The fixing of reasonable periods of time and area of operation has to be done by reference to what is permitted by law, the nature of the business and its area of operation. Obviously, the criteria applied for a retail shop in a densely populated city will be different from those, which will apply to a mobile phone operation in a sparsely populated rural area.

Settlement

By and large, most terminations, even for breach, can be settled between franchisor and franchisee in a civilised way.

Once the relationship has broken down an amicable parting is usually capable of achievement and will provide the best solution for a franchisee whose business may be bought, either by a franchisor, or by a prospective franchisee who is interested in taking it on.

Sale of Stock

Where property does not play a significant part in the operation of a particular franchise, the franchise contract may nevertheless require the franchisee to sell to the franchisor all his equipment, stock of products, etc. Such provisions operate for the benefit of both parties.

They enable the franchisor to ensure that the franchisee is divorced from the franchise system.

The franchisee, on the other hand, is able to obtain a fair price (if the content is properly drafted) for his equipment and stocks. These would otherwise be of little use to him, given the nature of the non-competition and restraint of trade covenants, which are invariably to be found in franchise contracts.

As we have seen, the end of a franchise relationship need not be as traumatic as some people appear to believe.

If the franchise is subject to a well-drafted contract, there is no reason why both parties should not know precisely where they stand in such a situation and be able to separate amicably.

However, this subject does provide yet another illustration of the need by both parties to have a contract which has been professionally prepared by an experienced franchise lawyer and specifically for the franchise in question with the objective of covering such eventualities as are foreseeable in that particular franchise.