When buying a franchise you will be expected to sign a
Franchise Agreement – but what will you be agreeing to? Vanessa Cathie a franchise specialist and consultant at Asco Legal, Auckland, explains...
Franchising
can seem like the safe option for budding entrepreneurs.
Unlike an independent business, a good franchise offers
tried and tested methods, systems for operating and
managing the business, ongoing support and training, and
a strong existing brand to leverage off.
However,
while franchising does offer considerable advantages, it
can also contain some pitfalls – traps for the unwary or
the careless. The best way to avoid those traps is to
identify and deal with any potential pitfalls at the
outset. And the best way to do that is to ensure you get
the right professional advice before entering into any
franchise agreement.
Unfortunately,
while this message has got through to many potential
franchisees, others are still cavalier in their
attitude. Perhaps excitement at the idea of owning their
own business is causing them to overlook certain
aspects. Perhaps they think they have already spent
enough money, and that additional expenditure on a
lawyer or an accountant will be wasted. Whatever the
reason, those who buy a franchise and sign an agreement
without taking formal advice are running a major risk –
and risk avoidance is one of the best reasons for
entering into a franchise agreement in the first place.
What Is The Franchise
Agreement?
The
franchise agreement is the legal contract which sets out
the arrangement between the person buying the franchise
(the franchisee) and the person selling it (the
franchisor). Among other things, it sets out the rights
and obligations of both parties, defines the length of
time the arrangement will last, stipulates the territory
(if any) granted to the franchisee, and details the
costs involved and how they are to be calculated. It is
the foundation stone of the whole business arrangement,
and can be up to 50-60 pages long.
Franchisees
need to be aware that while it is relatively simple to
enter into a franchise agreement, it is far more
difficult to extract yourself from such an agreement. A
standard franchise agreement is a long-term obligation
to a third party (often of six to ten years in length).
The agreement will include strict obligations on a
franchisee which have to be complied with for the full
length of the term. Failure to comply with these
obligations may (in many situations) allow the
franchisor to cancel the agreement.
By
contrast, most agreements provide the franchisee with
minimal, if any, rights to cancel. This point alone is
an example of the perceived imbalance of power in many
franchisor/franchisee relationships.
Who Does It Protect?
It
is generally recognised that any franchise agreement is
going to appear one-sided in favour of the franchisor.
When looked at on face value, certain provisions may
seem entirely unreasonable and outrageous, especially to
a franchisee who is investing his or her own funds in
the franchise system and therefore has a 'stake' in the
business. For example:
a)
the ability for the franchisor to make changes to the
operations manuals at any time and require the
franchisee to comply at all times with those changes
(even though the franchisee will not know what they may
be when signing the agreement);
b)
on any renewal of the franchise term, the franchisor may
insist that the franchisee signs the then current form
of
franchise agreement (the terms of which obviously
will not have been detailed at the time of signing the
agreement);
c)
the inclusion of very widely drafted cancellation
clauses in favour of the franchisor;
d)
the ability for the franchisor to determine the
application of advertising money invested in the
franchise system by the franchisees; and
e)
the ability for the franchisor to take over the day to
day running of the franchise in the event of poor
performance by the franchisee.
The
inclusion of these sorts of clauses is perhaps the
biggest psychological barrier that any potential
franchisee needs to overcome, for it requires them to
accept that, although they may have 'bought' a
franchise, they do not have total control over that
business.
However,
strongly-worded franchise agreements are also the
saviour of many franchise systems. What is of utmost
importance is the strength and consistency of the
franchise brand. For example, when you visit McDonalds
anywhere in the world you expect the food and the
service always to be of the same quality. Customers rely
on that. This is one of the major advantages of a
franchised business, and applies whether the franchise
relates to the sale of hamburgers or gardening services.
Whatever
the franchise you purchase, you want to know that your
hard work to maintain the brand is not being undermined
by the shoddy practices of a fellow franchisee. When
each of the above examples is looked at again in some
detail, any franchisee should be able to recognise the
benefit to them in these type of clauses. It is vital to
any franchisee's business that every other franchisee is
required to comply with the franchise procedures
currently in place as well as those procedures which are
being developed and improved over a period of time.
This
is the foundation of all well-run franchise systems. New
franchisees should not lose sight of the fact that the
franchise agreement needs to be strong in order to
control not only their practices but the practices of
their co-franchisees. more...
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