Legal guidance for Franchise Agreements

The franchise agreement defines the success or failure of the relationship between franchisor and franchisee. Mike Barlow of Franchise Lawyers Leathes Prior explains

One of the distinct advantages of a business format franchise is the prospect of establishing a new venture with the comfort of knowing that it is based on the franchisor's tried and tested business model. In most cases at least, this includes the promise of back-up which would not be available if starting from scratch. Of course, this does not guarantee success and it is clearly important for a franchisee to thoroughly investigate the franchise opportunity before committing what are likely to be significant resources in terms of finance, time and effort.

Are you getting what has been promised?
Most franchisees will heavily rely on the information provided by the franchisor as to the prospects of the business, whether by way of advertising materials, the franchisor's prospectus or financial projections prepared to illustrate profit potential. It is also quite likely that discussions with the franchisor will not involve any detailed consideration of the terms of the franchise agreement. Quite rightly, the main consideration for franchisee and franchisor alike is whether the franchisee is going to be able to make a success of the business.

While it is not suggested that reputable franchisors will deliberately seek to mislead potential franchisees, there are risks that a true picture of the implications of taking on the franchise will not made clear. It should be borne in mind that the franchisor will obviously seek to present the franchise opportunity in the best light in order to make a sale and the franchisee must be able to distinguish between the sales 'puff' and promises that can be relied on.

Ultimately, it is the franchise agreement which governs the relationship between the franchisor and the franchisee. It is therefore extremely important to make sure that any promises or representations made by the franchisor influencing the franchisee to proceed are confirmed in the agreement.

Why take advice on the Franchise Agreement?
It is probable that the franchisor has advised that the terms of its franchise agreement are standardised and is unwilling to change the agreement. That may be the case although it is not unusual for franchisors to agree minor amendments (and sometimes substantial amendments) by way of a side letter or supplemental agreement.

Even if the franchisor is unwilling to change the agreement, any commercial assessment as to the prospects of the business and the viability of the franchisee's business plan will require an understanding of the agreement. The franchisee will need to be satisfied that there are reasonable prospects for obtaining a return on the investment in the business over the term of the agreement. A detailed report on the agreement is an essential part of the franchisee's investigation into the franchise business and will allow the franchisee to identify which points require clarification and whether there are any serious deficiencies which might cause the franchisee to question any decision to proceed.

Why seek advice from a BFA Affiliated lawyer?
Franchise agreements are specialised commercial agreements and commonly contain a wide range of provisions which are peculiar to franchising. A well drafted agreement will be a comprehensive document and should comply with the British Franchise Association's code of ethics. This code deals with the essential minimum terms to be included in any agreement in relation to matters such as terms of payment, the use of the franchisor's system, the right of the franchisor to adapt the system or provisions relating to termination. An experienced specialist franchise lawyer will be familiar with the structure of such agreements, able to explain the nature of the agreement in the context of franchising and able to identify any unusual provisions or areas of concern.

It may be the case that a BFA Affiliated firm will be able to provide further information or contact details in connection with particular franchises either as a result of experience of dealing with the franchise in the past or through professional contacts so as to enable the franchisee to make an informed decision. Certainly those firms experienced in dealing with franchise disputes will be well placed to highlight the types of issues which may cause problems in the future.

Although it is the case that franchise agreements tend to be weighted in favour of the franchisor, this does not mean that individual terms are not negotiable (despite what the franchisor may say).

If a franchisor is new to the marketplace or is keen to recruit franchisees, valuable concessions may be elicited. An experienced franchise lawyer is likely to be better placed than a non-specialist lawyer to identify which issues may be capable of negotiation and, if required, to handle the negotiations for the franchisee.

The position with most contracts is that, once they have been signed, they tend to be filed away and only see the light of day if there is some uncertainty or dispute as to the rights or obligations of one of the parties. Understandably, franchisees will not be considering the likelihood of disputes arising when taking on a franchise - it seems rather negative to set out on a new venture thinking it may all end in tears!

That said, when instructing a lawyer it is prudent to establish whether, in the event of a dispute arising, your legal representative will have the support of a team experienced in handling franchise disputes. Experience of dealing with contentious franchise matters will mean that a franchisee's lawyers will be in the best position to explore the possibility of resolving disputes efficiently and cost effectively. This is likely to be further aided where the lawyer has been involved in advising and negotiating the terms of any particular agreement.

Leathes Prior
Leathes Prior is one of East Anglia's leading commercial law firms with a nationally ac-knowledged expertise in Franchising, intellectual property law and dispute resolution (including mediation). We are a full service practice and our enthusiastic and commercially minded lawyers complement professional integrity with a high level of personal service.

For Franchisors - Our role is to help meet the franchisor's objectives while ensuring that the hard work that's gone into building the business is properly protected.

For Franchisees - We aim to assess and negotiate any potential venture before you commit to it. We will prepare a detailed fixed fee report on the Franchise Agreement and related documents and advice on property issues and disputes. Our expertise is independently recognised by the legal profession's most authoritative refer-ence sources. For some years now, the legal directories have rated Leathes Prior as a leading firm.