What is a Franchise Agreement?
The Franchise Agreement is the document that governs the relationship between a franchisor and a franchisee. It sets out the rights that a franchisee has, the roles and responsibilities of the parties and plenty more besides. Franchise Agreements will vary substantially depending on the franchise network and the lawyer drafting them. However, here are some common features of Franchise Agreements:
Length – Franchise Agreement are long, detailed, documents! Whilst length is no indicator of quality we would expect a properly drafted Franchise Agreement to be at least 30 pages. However, some agreements (particularly those from brands in the USA) can be over 100 pages.
One-Sided – Franchise Agreements always favour the franchisor, and with good reason. The franchisor is trusting the franchisee with its brand and business model, therefore the franchisor will always want to protect itself and its business from any bad franchisees. Sometimes, franchisors can be a bit overzealous in their franchise agreements and, as such, it is important that a franchisee checks that the agreement is drafted in a manner that complies with the European Code of Ethics for franchising before they sign on the dotted line.
Personal Guarantees – it’s not just the franchisor and franchisee companies that are parties to the Franchise Agreement, invariably the franchisor needs the human being(s) behind the franchisee company (usually the shareholders and directors) to personally guarantee the obligations of the franchisee company.
Restrictive Covenants – a concern of franchisors when they franchise their business is that they are potentially “training future competitors”. Therefore most Franchise Agreements contain restrictive covenants which prohibit the franchisee (and usually its shareholders and directors) from operating a similar or competing business after the termination or expiry of the Franchise Agreement. These do have to be carefully drafted to ensure enforceability though!
Frequent references to the Operations Manual – the Operations Manual is the document (or more often than not these days, the online portal) which contains all the policies and procedures of the business. The franchisee is obliged to comply with all these policies and procedures as they are updated from time to time during the term of the agreement. When a Franchise Agreement is signed, the franchisor can’t amend it without the approval of the franchisee. However, the franchisor can update the Operations Manual as regularly as it likes. As a result, most Franchise Agreements will have frequent references to the Operations Manual to allow the Franchisor flexibility to change processes and procedures during the term.