Franchises: the legal issues

I have noticed that more and more mums are buying into franchises to set up a business they can either run from home or give them more flexibility as their own boss. This is a great innovative way of starting your own business and I am a great believer in striking whilst the iron is hot. However, often large companies entice you into these arrangements and little thought is given to how you end these agreements if your circumstances change or it doesn’t work. So yes look to go it alone, I did, and it is well worth it, but just go armed with the right information and support.

So here is my short and sweet take on franchises big and small:

What are the legal stages of a usual franchise transaction?

What is the franchise agreement likely to include?

What if you want to sell the franchise on or end the relationship?

What can go wrong?

What else might you need to think about?

The Legal Stages

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

Often you will be asked to sign a confidentiality agreement if confidential information, such as client data or trade secrets, are being provided/discussed;

You may then enter into a deposit agreement. This payment may be non-refundable; Your lawyer should then go through the franchise agreement itself to ensure you understand all its terms and your obligations;

Take legal advice on a lease/rental agreement if applicable and sign/understand the appropriate landlord and tenant notices;

Sign the franchise agreement and make the payment as required in the agreement;

Understand the exit clauses, what happens if the franchisor goes bankrupt or sells your lease or you want to terminate the agreement.

Standard terms in a franchise agreement

As there is no specific legislation for franchising, the franchise agreement is the only means to set out and agree the parties’ rights and obligations and the relationship you. If any disputes arise at a later date this contract will be used to clarify and determine the intentions, rights and liabilities of the parties. So make sure you understand it and are happy with it.

The Franchise Agreement should:

Specifically bind you both.

Establish and clarify the rules to be observed by all the parties.

As such you will look for guarantees, where applicable, to:

Have any staff trained by them;

Supply goods and / or services;

Assist you set up the business;

Perhaps develop or market the business;

Maybe provide infrastructure such as accounting services;

Allow you to use their intellectual property and resources;

Provide any information on any set prices and expenses to be agreed.

Selling your franchise

The majority of franchise agreements will have a provision stating that where you want to sell the business, the consent of the franchisor is required, but that the franchisor will not unreasonably withhold that consent.

As such questions we get often get asked are: what if the franchisor does not like the potential buyer or denies the sale for an unknown reason or disputes the price I am offering to sell it for? Can I still sell?

It may be that the franchisor refuses consent to a sale where it believes it will lead to financial failure – perhaps because the price is too high or the Buyer has no previous experience or a poor credit history. This reasoning would be considered fair and justified. In order to refuse consent the franchisor has to show that it has reasonable grounds for this decision. So simply not liking the buyer will be hard to establish as a genuine right to refuse consent.

If at the end of a fixed term, you hold a right of renewal, you can choose not to exercise that right and/or you may sell the business and the purchaser may be granted a new franchise agreement if that is permitted.

The terms are often clear as to what must be done to terminate the agreement, but the parties should also pay heed to the post-termination provisions of a franchise contract. The franchisor will always seek to protect its goodwill, client base and trade secrets so be careful to understand the full scope of those restraints as it may restrict your future trading.

Restraints

Difficulties often arise regarding 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. As such these need to be considered seriously before entering into this arrangement as it could affect your future trade or career.

What else might you think about

Whether you are buying, selling or renewing your franchise you should also consider or address the following:

You may need employment contracts for which you may need legal advice;

You may need to amend or draft your Will to include your new business or shares for fax efficiency and to ensure your loved ones and/or business is protected;

Should any debt collection or disputes that arise you will need advice and help in recovering these sums swiftly and efficiently.

*More tips and antidotes will follow in the next diary entry, but if anyone has burning questions I am happy for you to email me directly  at [email protected] or contact Workingmums.co.uk and they will pass on your questions. Karen Holden runs A City Law Firm in London. She juggles running a business, managing staff and being a mum. For any legal advice on running a franchise, contact her.

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