Key legal issues for potential franchisees

Clive Rich, Franchisee, legal issues

 

When you enter into a franchise agreement as a franchisee you are often taking a big step. If you are doing this for the first time you will have identified being a franchisee either as a lifestyle choice that suits you (because you can organise your work flexibly) and/or an easier way of being in business (because you don’t have to establish a brand from scratch) and/or an occupation that offers a steady income for you. So, you want to make sure that you are not going to come unstuck legally.

Here are some key tips:

1. Due diligence
You must carry out some due diligence on your franchisor before you start. This includes:

a) Financial due diligence: Carry out a credit check on the Franchisor. Check out its latest accounts. Find out about its financial reputation.
b) Market due diligence: Are you sure there is really a real need for this product or service? Check out the competition in the area you are taking on.
c) Other franchisee due diligence: Talk to existing franchisees of that franchisor and find out as much information as you can from them.

After you have done this due diligence there are number of other legal issues to address.

2. Duration
What’s the length of your agreement? It is typical for a franchise agreement to last for five years and give franchisees one or two “automatic” renewal options to carry on for a period after that.

3.Exclusivity
Are you getting exclusivity in relation to a geographical area or will there be other franchisees competing with you?

4. Manual compliance
Most franchise agreements contain a manual or style guide which you have to comply with in the way that you run the business – make sure that you can live up to the obligations imposed by the franchisor in this respect.

4. Guarantee
Are you being required to guarantee any of your payments or obligations personally? This is sometimes requested – particularly if you are a new franchisee. This is a big step – it means you are personally liable for any breach by your franchise company of the franchise agreement.

5. Restrictions

What restrictions are there on your other business activities either during or after the term? Do any activities during the term require the franchisor’s consent? After the term are you prevented from acting in a particular area or a particular business? If so for how long?

6. Renewal
Make sure that you can take advantage of your investment by having a renewal right. If you are granted one or two renewals then make sure there is no additional renewal fee payable, and that no other material terms of the agreement (such as the level of fees) change.

7. Sale of your business

Ensure that, when you are ready, you can sell the business for its market value. The franchisor may wish to agree the identity of your buyer and may want a first right to purchase themselves, but try to make sure they can’t prevent you realising the capital benefit from the sale of your business.

8. Minimum performance
Watch out for minimum performance clauses which either require you to pay a minimum amount of continuing fees, or to perform to minimum levels, failing which the franchisor may have remedies against you including termination.

9. Approvals
You can expect to see a lot of approval rights in the franchise agreement for the franchisor (eg over marketing materials, suppliers and even stationery). Are these approvals limited in some way? Eg ‘Not to be unreasonably withheld or delayed’ or ‘with bona fide reasons given in writing for any failure to
approve’.

*Clive Rich is CEO and Chairman of LawBite, an online legal service providing Simple Law for Small companies. He is also a legal expert on Workingmums.co.uk’s site. LawBite is headline sponsor of Workingmums.co.uk’s first Top Franchise Awards in May. The Awards are open for nominations until 4th March. For more information, click here.





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