More franchise agreement clauses franchisees should see in their franchise agreement

More franchise agreement clauses franchisees should see in their franchise agreement

In the second blog in our series examining clauses franchisees should see in their franchise agreement, we cover five more clauses. Over the next few months, we will cover the rest of the usual clauses you should expect to see in your agreement, guiding you through what they mean.

Why do these clauses matter?

In a nutshell, because your franchise agreement will impact on everything to do with the business you are taking on as a franchisee.

The terms of the franchise agreement offered by the franchisor will govern the relationship between you and the franchisor going forward. Therefore, understanding what each clause means for you – what your rights and obligations will be – is vital.

Before you sign up to anything, it is crucial to get expert advice from a specialist franchise lawyer on your franchise agreement (and to make sure you fully understand everything).  It is very usual to see a right to change mind clause in a franchise agreement and therefore once you have signed the agreement you are committed to it for the length of the agreement.

Five clauses

1. Fees: This clause sets out the fees payable to the franchisor which include: the initial fee for the right to license and operate the franchise business. This is the amount a franchisee must pay to get their business going, which includes training and initial kit so it is important to understand how much will be due at the outset. It should be distinguished from the ongoing management service fee that will either be a percentage of turnover or a set monthly fee. Some franchisors also include other fees here, such as for IT.

It’s therefore important to make sure that this clause accurately reflects what you are expecting to pay and, properly records any negotiations you may have had previously with the franchisor.

They say the devil is in the detail and you should read this clause with the relevant schedule to the agreement which will contain more detail on how fees are calculated. You need to ensure that this clause is very clearly drafted to avoid misunderstandings later.

2. Training: This clause sets out the rights and obligations regarding the initial training and continued training offered by the franchisor. This could impact the success or failure of your business, so make sure you are happy with what is being offered.

3. Accounting Records: This clause sets out the franchisor’s rights to access a franchisee’s business records and accounts as well as the detail of what records need to be kept. Understandably, the franchisor will require this information to be shared so it can monitor how the business is going.

4. Guarantor: If the franchisee is operating as a limited company rather than as an induvial, there is likely to be a personal guarantee required as part of the franchise agreement. The “Guarantor/s” guarantee the legal obligations of the franchisee company. Many of the obligations are identical to those placed on the franchisee itself but apply to the individuals behind the franchisee company, ie. the shareholders of the limited company.

5. Data Protection: This is often a standard form clause in many types of agreement, but it is important as there are now potentially serious consequences for breaching legal requirements. This clause sets out the franchisee’s obligations with respect to compliance with data protection laws. These will apply to customer, employee and others’ personal data, so make sure you fully understand what is required. The franchisor should tell you what appropriate processes you should put in place to meet your obligations.

The franchisor will tell them what appropriate processes they need to put in place, the franchisee just needs to make sure they adhere. [GU1]

–Roz Goldstein, Franchise Partner