Buying – or selling – a franchise is a big step; not least because it’s the start of a beautiful (contractual) relationship. But what if the relationship turns sour? A contract – such as a franchise agreement – provides legal certainty should one party fail to carry out their rights and obligations, as defined in the contract. Whether you’re a franchisor or a franchisee, you’re going to have to get your head around the franchise agreement. Here’s what you need to know, in a nutshell…
What is a franchise agreement?
A franchise agreement is a legal document detailing the business contract between a franchisor and a franchisee, and binding them together in a contractual relationship.
Why should I have a franchise agreement in place?
The franchise agreement defines the terms and conditions of the contractual relationship into which the franchisor and franchisee are entering. This legally binding document defines the rights and obligations of both parties, protects their interests, apportions risk and helps manage it, helps prevent confusion and offers protection in the event of a dispute down the line. While legal documents most often favour the party who drafted it, a franchise agreement should be to the mutual benefit of the franchisor and franchisee, if it’s to promote the win-win scenario on which the franchise model depends for success.
What is in a franchise agreement?
A franchise agreement is a comprehensive legal document, detailing all aspects of the franchise and the franchisor-franchisee relationship. Important clauses to include in the franchise agreement include:
- Definitions – presented upfront, this clause will provide details and descriptions of the franchise business, the parties involved and all intellectual property (i.e., trademarks, logos, copyright, trade secrets etc.)
- Grant Clause – details which type of franchise licence is being granted; whether exclusive, sole or ordinary (see below).
- Payment Clause – details how the franchisee is to pay the franchisor, and when. This clause will detail the franchise fee (the upfront payment made by the franchisee to the franchisor); franchise royalty fees (ongoing fees to remain in the franchise system) and ongoing contributions to the franchise’s advertising/marketing/promotions fund (usually a percentage of turnover).
- Franchisor and franchisee obligations
- Assignment/Cession/Alienation of rights – a clause which disallows sub-franchising without the franchisor’s knowledge and consent
- Termination Clause – include the terms and conditions under which the agreement may be cancelled (terminated). It’s also wise to include a clause relating to terms and conditions after termination, setting out to what the franchisor and franchisee are entitled, post termination.
- Restraint of Trade – a clause detailing reasonable terms and conditions related to restraint of trade, as it applies to the activity, geographical area and time period.
- Confidentiality Clause – covering trade secrets and other confidential information passed from franchisor to franchisee.
- Probation – franchisors may wish to include a probation period (for example, a probation period of six months), during which the fit between franchisee and franchisor can be properly assessed.
What are the different types of franchise licences?
There are three types of franchise licences:
- Exclusive Licence – grants exclusive rights to a franchisee, who is allowed to operate in one designated area, to the exclusion of others, including the franchisor
- Sole Licence – grants sole rights to a franchisee, who is allowed to operate a franchise in a designated area, excluding all other franchisees, but not the franchisor, who retains the rights to open and operate a franchise in competition to the franchisee
- Ordinary Licence – the franchisee is granted the rights to use the franchise’s intellectual property, but not at the exclusion of others in the same area. In other words, other franchises and the franchisor are free to open and operate franchises in the same area.
Can I compile my own franchise agreement?
A franchise agreement is a complex legal document which must be drafted by a qualified and competent franchise attorney – don’t try this at home, folks! Both the franchisor and the franchisor would be well advised to have their attorneys peruse any franchise documents, including the franchise agreement before they sign on the dotted line.
- The new Consumer Protection Act, No. 68 of 2008 provides the first clear legal definition of a franchise agreement.
- Franchisors must ensure that the franchise agreement, and other franchise documents, complies with the Consumer Protection Act.
Author: Franchise Finder, Online Directory of Franchises and Business Opportunities in South Africa