Legal stages of the franchise

When buying a franchise, there are several legal steps you must go through. Before signing any franchise agreement or other legal franchising documents, it is vital that you seek legal advice from a legal advisor / attorney specializing in franchising.

There is no point in using the same lawyer you used when you bought your home, as though they might be very good at what they do, they are not experts in franchise law.

Step 1 - Many franchisors at the interview stage will ask you to sign a confidentiality agreement. This allows them to provide you with confidential information about their business and seeks to prevent you from disclosing this information to others. It is normal practice for a franchisor who discloses confidential information to ask you to sign it.

Step 2 - You may be required to enter into a deposit agreement which will require you to pay a deposit to the franchisor. Please note that not all deposits are refundable and therefore if you decide not to proceed with the purchase of the franchise, you may not receive your deposit back. You should always ask if the deposit is refundable. If not, you need to be sure that you are serious about franchising.

Step 3 - Obtain a copy of the franchise agreement from the franchisor. This is the legal franchise document that outlines the obligations of both the franchisee and the franchisor; protect the interests of all parties involved.

Step 4 - As the franchise agreement is weighted in favor of the franchisor and will not be changed by the franchisor, it is vital that you have a legal advisor / franchise attorney review the agreement for you. You should only use a legal advisor / attorney specializing in franchise as this will be vetted through hundreds of agreements and although it cannot be changed they will have the experience and knowledge to highlight to you those areas that you need to be aware of. They may also advise you to apply for a secondary letter if appropriate. A normal legal advisor / lawyer cannot do that.

Step 5 - If the franchise is premises based, you should also seek legal advice when looking to buy/lease premises.

Franchise agreements are usually long (around 40-60 pages) and contain many obligations and restrictions for the franchisee. Before signing the agreement, it is important to get franchise legal advice from an ARF affiliated legal advisor/solicitor who will be used to seeing franchise agreements across the industry. While the terms may be stated to be non-negotiable, it is still essential to know your legal position.

Check that the initial franchise fee and royalty payments match what the franchisor told you.

You will also have to pay any other costs, e.g. for additional equipment and training; and will there be additional costs if you want to renew at the end of the term?

Most ongoing royalty payments will be calculated as a percentage of turnover rather than a percentage of profit and therefore you may still be required to make payments to the franchisor even if your business registers a loss.

Finally, be aware of unexpected costs, meaning that often if you choose to sell the franchise business, you will have to pay the franchisor a percentage of the sale price, especially if they introduced you to the buyer.

Franchisees are often prevented from being involved in other business interests during the term of the franchise agreement. If you have other business interests, you will need to ensure that the franchisor gives written consent for you to continue to manage them.

What franchisees are not normally aware of are the post-termination restrictions that prevent them from engaging in a business that is the same or similar to the franchised business (post-termination restrictions normally cover a specific geographic area and lasts for a period of time). fixed period, i.e. one year after termination). Such restrictions could have a significant impact on your ability to continue in your chosen industry after the agreement is terminated.

There are often extensive termination provisions in favor of the franchisor, allowing the franchisor to terminate early if the franchisee breaches the agreement.

However, once the agreement is signed, the general position is that the franchisee cannot terminate until the end it of the initial term (usually five years), even if the business does not work. A franchisee could argue that there was a misrepresentation by the franchisor as to what was sold or that the franchisor breached the agreement. However, such cases can be difficult to establish and are rarely clear-cut. Alternatively, the franchisee may sell the franchise business. This is likely to be difficult if the business is failing or has little goodwill.