Successful Franchising: Key Terms of a

Franchising Agreement

CONTENTS
1. An Introduction into Franchising
2. Pilot Testing
3. Franchise Agreements
a. Introduction
b. Guiding Principles
c. Outline Agreement

4. Operations Manuals
5. Property Documents
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1.

An Introduction into Franchising

What is a franchise?

Types of Franchises

What are the alternatives to franchising

What is a franchise?
Business Format Franchising contains 4 essential
elements
The Frsor allows the Free to use a name which is
associated with the Frsor
The Frsor exercises continuing control over the Free
The Frsor provides assistance to the Free
The Free has periodically to make payments to the
Frsor.
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Types of Franchises
Two main types:
1.

Product distribution franchises licences TM & logo, Free not

provided with entire system for running business.
Product distribution
Eg: soft drink distributors, car dealers and gas/petrol stations

2.

Business format replicate business format. Most common

form of franchise Free uses/replicates the complete method
to conduct the business.
Business format
Eg: fast food, retail, restaurants, business services and lodging
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Alternatives to Franchising
1.

Distributorships

D purchases products in his own name

Has no connection with Supplier/wholesaler

Familiar with local markets

Deals with more than one supplier/producer;

No/limited support, training from the supplier/producer

D free to operate business, maybe regulation relating to stock levels, turnover

& advertising Cf: franchising

Free pays an initial fee and continuing fees

D pays a one off purchase price. Profit element to supplier is difference in

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manufacture/purchase costs and that which he sells at

Alternatives to Franchising
2. Agency:
1.Agents do not purchase in their own name
2.Contracts directly by supplier and customer or agent
on suppliers behalf
3.Few restrictions t - relate to the agents powers to
incur liabilities
4.Some Franchises have agency-principal relationship
eg: parcels delivery franchises customers contracts
with Frsor but delivery/collection by Frees.

3. Licensing
1.IP rights licensed to a manufacturer to enable
manufacture to produce/sell
2.Pay for rights to use particular trademark
3.Supervise the use of the license - limited
4.Most FA contain a licence to use TM & Brand however
FA more heavily regulated

Alternatives to Franchising
4. Acquisition/Setting up a Subsidiary;
Straight acquisition of an existing business or
establish a wholly owned subsidiary - provides
maximum control

5. Joint Venture:

2 or more companies/firms agree establish a

common enterprise in which they intend to
participate jointly;
Frequently international in nature
Advantageous

(2) Pilot Testing

Why pilot test - Purpose
prove the financial viability
ensure Frsor able to transfer its know how
and
Chance to refine the franchise process itself
2 way process for transferring know how and
experience
Enables Frsor to develop its Operations Manual

(3) Franchise Agreement

Introduction
Care and skill required in drafting FA
FA fundamental to success of franchise:
Negative impact
Reflect current custom and practice
Accurately reflect the way the Frsor operates the
business
Protect from Free claims

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Franchise Agreements Guiding

Principles
Protect reputation of the Frsor;
tough
but to strike correct balance

Achieved by:

Balance
Limit Discretion
Selling Document
No legal terminology and well presented
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Franchise Agreements - Guiding

Principles
Easily understood otherwise slow down process
Do not change FA for individual Frees
Variables premises, equipment package, minimum
performance, key people often set out in Schedule

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Outline Franchise Agreement

No two FA are the same - are some basic
provisions
Skeleton form of FA and notes in Handout
Parties: Franchisor, Franchisee, Individuals
Natwest/BFA Survey: 36% Sole Traders; 22%
Partnership & 41% Companies
Corporate Free New Co, no assets; desirable to obtain
individual guarantee
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Outline Franchise Agreement

Directors/major Shareholders:
restrictions on transfer of shares &
subject to Restrictive Covenants

Recitals:
set out the background and could form part of factual
background in which to construe contract

Definitions:
essential that all terms used in FA are clearly set out.
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Outline Franchise Agreement

Rights granted
Exclusive FA: Frsor not appoint another Free in
the Frees territory; Danger for new Franchises.
An exclusive/non-exclusive licence to :
Operate Business within the Territory (from Premises)
Use of trade names and trade marks
Use Frsors copyright, material, know-how, knowledge
Benefit from Marketing knowledge & experience of Frsor

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Outline Franchise Agreement

Term
Usual initial term is 5 years
If less than 5 years unlikely to be a franchise
BFAs code of Ethical Conduct: Extension and
Interpretation and Art.5.4 of the European Code of
Ethics
term to be sufficiently long to pay back the Free initial
investment
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Outline Franchise Agreement

Franchise Fee (Initial Fee)
Free should not be trained until full fee has been paid
off
Initial fee should not contain a profit element
Amount will depend on reputation of Frsor and
profitability of his franchise
Free to pay Frsors legal costs discourages
attempts by Frees legal advisors to negotiate the
terms of the FA
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Outline Franchise Agreement

Rights of Renewal
Essential to enable a Free to renew term
At the end of initial term optional for Free
Renewal should be exercised without further payment
Not to be lost for trivial/minor breaches of FA

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Outline Franchise Agreement

Renewal (contd)
Frsor may introduce further requirements:
Are-vamp clause & relocation clause
Must be necessary to revamp or move; costs effective
Demonstrate that the revamp resulted in better financial
performance for other Frees
Frsor to assist with sourcing finance

Indiv/Free to give up all claims against Frsor

Enforceability issues in light of UCTA
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Outline Franchise Agreement

Rights of Renewal & Minimum Performance clauses
Which apply on renewal only are acceptable
Appropriate if all franchise territories are comparable &
some form of exclusivity has been granted

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Outline Franchise Agreement

Frors initial obligations to provide advice on:

Finding premises & alterations to the premises

How to set up the franchise
Such equipment, stock etc as set out in the Schedule
PR launch
Initial training programme
right not to enter into FA and
reimburse costs

Operations Manual on loan to Free

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Outline Franchise Agreement

Franchisors continuing obligations
Provide Free with know how, advice & guidance
relating to the Business
Supply products to the Free
Supply stationery when required
At cost, train Frees personnel
Organise an annual conference for Frees
Try and set out Frsors obligations extensively
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Outline Franchise Agreement

Franchisees Obligations
Refurbish & equip the Premises as required by Frsor
To use Frsor supplied stationery, invoices & products
Operate the Business in accordance with Operations
Manual
Use only signs & packaging in connection with the
Business as approved by the Frsor
Premises:
Maintain to the highest standards and
not to carry out any alterations without Frsors consent

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Outline Franchise Agreement

Frees Obligations (contd):
Use best endeavours to promote & extend Business
Operate the Business during specified hours
Ensure that staff are well dressed clean and polite
Not employ a manager unless:
been approved by the Frsor and
completed Frsors training course

At the request of the Frsor provide potential Frees

with information as reasonably requested

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Outline Franchise Agreement

Training
For Individuals corporate Free (no charge)
For Frees employees and subsequent managers (at
cost)
Initial training often FOC but during term at cost

Continuing Fees

Management Fee 6-10% average of Turnover

In high turnover franchises can be paid weekly
Payment by Direct Debit
If Free purchase goods/services from Frsor, Frsor
will have a mark up on such gods/services supplied
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Outline Franchise Agreement

Accounting Records Free shall:
Maintain record of gross turnover & submit to Frsor
Records needed to calculate Management Fee &
Marketing Levy as specified in the Operations Manual
Maintain records to verify gross turnover for 6 years
Frsors right to enter the Premises to review
Supply to the Frsor copies of all VAT returns
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Outline Franchise Agreement

Advertising/Promotions
Free to contribute to national advertising and
marketing by way of a Marketing Levy (2-4%)
Marketing Levy received kept in a separate marketing
account - audited annually
All advertising is to be approved by the Frsor
Free free to advertise on internet as long as not
active selling
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Outline Franchise Agreement

Insurance
Uncertainty - Frsors liability for act of Free
Relate to conduct of the Business & as Frsor shall
reasonably require (Ops Manual)
Frsors interest to be noted on policies &/or
Provide Frsor with copies of policies and evidence of
payment of premiums
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Outline Franchise Agreement

Trade Marks
Frsor has to warrant that it is able to licence the use
the Trade Marks?
If it has Registered TM no problem
If not no warranty should be contemplated

To bring a passing off action in relation to unregistered

trade marks, the Frsor must be able to show that it
has retained goodwill in them
Free to notify Frsor if it becomes of any
unauthorised use
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Outline Franchise Agreement

Improvements
Right during term to introduce amendments and
improvements
Who is to pay for the new technology
Ensure not impose too high a financial burden on
Free
Not require Free to make extensive improvements
just before expiry of the initial term of FA
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Outline Franchise Agreement

Manual
Deals with day to day operations
Power to amend the Manual during term
If not, will be unable to introduce modifications or
amendments to the system

Definitive copy of Manual to be retained

In event of conflict between the FA and the amended
Manual, the FA would prevail
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Outline Franchise Agreement

Telephones, fax & domain names
Main source of advertising will be directories hence
control of numbers is important esp. on termination
Free only to use the telephone numbers which have
been notified to the Frsor for the Business
Consider:
Frsor to subscribe to the number or
Request Free to sign undated mandate which is exercisable
on termination (transferring numbers/names to Frsor)
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Outline Franchise Agreement

Sale of Business
Frees right to transfer subject to Frsors consent
The Frsor shall consent to a transfer provided that:
The purchaser meets Frsors min. standards
To include business experience and financial resources

Payment of investigation and training cost

There are no subsisting breaches of the FA

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Outline Franchise Agreement

Sale of Business (contd.)
Option to match offer made to the Free
Frsor may require payment of a finders fee
Other matters may be taken into consideration such
as aptitude for the business, references, etc
Must ensure that tests are not too subjective otherwise the
Frsor would effectively have a right of veto

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Outline Franchise Agreement

Non-Competition
During the term of the franchise neither Free nor the Individuals will:
Carry on any other business
Entice employees from the Frsor or other Frees
Use or disclose confidential information for any purpose other than a
purpose set out in FA

Staffing
Senior employees of Free not to make use of Frsors confidential
information
Consider use of Side Letter/Deed of Confidentiality hence will be subject
to restrictive covenants and obligations of confidentiality

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Outline Franchise Agreement

Death of Individual
FA does not bind the Individuals personal
representatives
A manager for a period of 3 months, on payment of
the Frsors then current costs and expenses
Within the 3 months period the Individuals personal
representatives or beneficiaries must either: Qualify as a Free by training (same a for new incoming Free) or
Notify the Frsor of their desire to sell the franchise
failing which the Frsor may terminate the FA
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Outline Franchise Agreement

Termination (1)
It is unusual for Frees to be given an express right to
terminate
If Frsor wishes to terminate because of Frees
breach, the Free should be given notice of any
breach and reasonable time to remedy a default
The Frsor may terminate the FA if the Free:
Fails to commence business within 3 months of execution of
the FA
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Outline Franchise Agreement

Termination (contd) 2:
Breach of specific terms of the FA list out those
terms which amount to fundamental terms
Persistently defaults in payment of any amounts
due to Frsor
Is found to have supplied materially false or
misleading information in or supporting the
franchise application
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Outline Franchise Agreement

Terminations (contd) 3
Failure to rectify in specified period breaches
which can be remedied
Goes into liquidation/bankruptcy or is insolvent
Abandonment of business
Serious criminal convictions

Note: Consider inserting a liquidated Dm clause for sums payable

by Free on termination issues of enforceability.

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Outline Franchise Agreement

Consequences of Termination
Following termination of the FA the Free:

Must cease use of the Frsors trade name and trade marks
Not hold itself out as being a Free of the Frsor
Pay all sums due
Return all manuals, literature, promotional material etc
Provide the Frsor with a list of all customers and potential
customers of which it is aware problematic due to
ownership issues
Not make use of or disclose confidential information relating
to the system of the franchised business

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Outline Franchise Agreement

Restrictive Covenants:
Drafting Note:
Will only be enforceable if it is reasonable to protect legitimate
interest of Frsor blue pencil test.
Make sure that RC does not simply prevent Free from carrying
on business as Frsor
Need to ensure that Free does not compete with Free business
and that of the Frsor
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Outline Franchise Agreement

Free & Individual shall NOT:
Compete with the former Frees business/Frsor:
Expressed by reference to geographical limit and temporal (time)
restrictions eg:
1 mile or 700 yards of the former premises or any other
franchised or corporate owned premises
For 6 or 12 months

Solicit or entice customers of the former business

Actual or those who had expressed an interest

Recruit former employees

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Outline Franchise Agreement

Individuals Guarantee
The Individuals shall indemnify the Frsor against any
breaches of the FA by the Free

Representations
the Free and the Individuals confirm that they have not relied
on any representations or warranties from the Frsor in
entering into this Agreement
Must be drafted with great care to ensure effectiveness of the
clause in order to protect the Frsor from misrepresentation
claims
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Outline Franchise Agreement

Acknowledgement & Non Reliance Clause
Not exclude liability for fraudulent
misrepresentation eg: where Frsor made wholly
unrealistic forecasts and representations
Acknowledge that Free has not relied on any
statements made by Frsor
Remember UCTA and any similar legislation.
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4.

Operations Manual

1. Introduction

Brief summary of the franchise business

What the franchisee will have to do
What the franchisor will provide
Details of the existing franchise network franchisors business philosophy

The

2. System

A detailed description of the system and each of its

elements
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Operations Manual
3. Operating Methods
A list of what is required in the business should be
set out and should include:-

Equipment

How the equipment is to be operated

Equipment problems
Stock requirements
IT requirements (hardware and software)
Vehicle requirements
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Operations Manual
4. Operation Instructions
All matters relating to the operation of the business
should be set out in detail and will include:

Standard procedures
Financial records
Financial reporting
Payment of franchise fees

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Operations Manual
General accounting, (VAT, PAYE and Income/Corporation
tax) information on how to complete necessary forms
Cash control and banking procedures
How to deal with cheques, debit cards and credit cards
Staff requirements
Staff uniforms
Advertising
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Operations Manual

Staff training
Procedure for disciplining staff
Summary of employment legislation
Breakdown of job description for staff
Opening times
Trading patterns
Purchasing requirements and stock levels
Pricing policies
Insurance

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Operations Manual
5. Outlet

Suggested location of store

Store layout
Display and merchandising techniques
Cleanliness
Complaints procedure

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Operations Manual
6. Standard Forms

All standard documentation and forms required to be

used in the business should be set out.

This may include:

Business Names Act notices

Accounting and financial forms

Ordering forms

Stationery

Data Protection Act forms

Contracts of employment
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Operations Manual
7. Legal Issues

A summary of relevant legislation should be provided.

8. Franchisor's Directory

A list of the franchisor's employees with their job

descriptions and reporting structure
Useful telephone numbers and contact details

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5.

Property

These could include:

Lease (if the Frsor is the immediate LL on termination
just take over the premises)
Deed of Option upon termination, the Frsor has the
option to take over occupation of the premises subject to
LL consent

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