Despite the undoubted affect of the COVID-19 pandemic on other commercial industries, the franchise sector has emerged relatively unscathed. More people than ever continue to seek the tried and tested model permitting self-employment, while benefiting from the operational structure and goodwill that an established brand affords.
However, for prospective franchisees looking to operate their first franchised business (and indeed those renewing at the end of a term), the idea of reading the provisions of a franchise agreement can be daunting. While it can be tempting to sign a franchise agreement without seeking legal guidance, the terms contained therein are often legalistic, onerous, and even contain personal obligations.
This article will explore some of the key reasons why prospective franchisees, and those in the process of renewal, should seek the assistance of a legal professional in order to complete a comprehensive franchise agreement review and comprehend the extent of their obligations.
A Franchise Agreement is a Commercial Contract
Those wading into franchising for the first time can be forgiven for believing the law offers some form of protection should they make a wrong decision. While it can be tempting to assume that Consumer Protection legislation may offer a shield against unscrupulous franchisors, this is not the case.
Franchise agreements are by their nature commercial documents. In light of this commerciality, and despite the inequality of bargaining power between the parties, this means that the terms of a franchise agreement are binding. Should a franchisee not fully appreciate the provisions before signing, there are typically no immediate rights permitting termination of the agreement.
There is of course the option to enter into a legal dispute with the franchisor on the basis that the business may have been mis-sold or misrepresented. However, this avenue is likely to incur significant legal fees, and achieving termination without the payment of damages to the franchisor is not guaranteed.
Due Diligence of the Franchise Agreement is Important
Most, if not all, prospective franchisees appreciate that carrying out as much research as possible into the franchisor and wider franchise network is critical. Unfortunately, this approach to risk does not always stretch to encompass the necessary legal documentation required to formalise the arrangement.
Review Franchise Agreements
Franchisees should always be encouraged to extend their due diligence to include the terms of the franchise agreement itself. While gaining an insight into the operation of the business is of course crucial, a franchisee's legal relationship with the franchisor will be dictated by the terms of the agreement. Among other things, the agreement itself will expressly include an entire agreement clause, effectively nullifying any earlier verbal or other discussions between the parties.
With the above in mind, it is especially important to ensure due diligence extends to a review of the franchise agreement when the inclusion of special terms has been agreed. It is not uncommon for a franchisee to believe that carefully negotiated advantages have been included, only to sign the agreement and later realise that these have been omitted entirely.
Whilst a franchisor might state that their agreement is non-negotiable, it is not uncommon for an addendum of changes to be agreed alongside the standard form franchise agreement, departing from or clarifying some of its terms.
A Personal Guarantee will likely be included
Most franchisors will permit the operation of a franchise business by a limited company, with the company executing the franchise agreement in its capacity as ‘franchisee’. However, in order to combat the limited liability of said company, the franchisor will usually require the inclusion of a personal guarantee. In essence, personal guarantees require an individual to agree to carry out the obligations of the limited company should it be unable to do so, including those of a financial nature.
Personal guarantees are very common in franchising, but do present a risk to the personal assets and livelihood of the individual acting as guarantor. Therefore, it is important that the provisions of the guarantee are fully explained and do not go further than necessary to protect the franchisor’s interest under the agreement.
There may be Hidden Obligations and Costly Provisions
In the initial stages prospective franchisees will receive a wealth of marketing material from the franchisor setting out typical obligations and projected earnings. However, material of this nature is always qualified to state the information is indicative only and the franchisor is not liable for any statements contained therein.
As can be expected, the information contained in such commercial advertising therefore does not always accurately reflect the obligations contained in the agreement itself. Many a franchisee has signed a franchise agreement in reliance on such material, only to later be liable for higher than anticipated fees and/or additional hidden expenses. For example, often the franchisor is able to require the franchisee to destroy and republish its marketing materials or amend its processes, to fall in line with changes to the franchisor’s brand and system requirements – this can be costly if frequently exercised and a franchisee might seek an addendum ensuring that changes of a greater than acceptable frequency are met by the franchisor.
Having your franchise agreement reviewed by a legal professional will allow you to execute the document with any addendums you need to give you peace of mind, and an informed understanding of your obligations and risks.
Enjoy That? You Might Like These: