McDonald’s, Domino’s, Starbucks, Subway, Costa Coffee, … the list still goes on and you would be surprised because a lot of familiar names you probably have come across and have no idea that it is a franchise.
Nowadays, franchise business models are too popular to be ignored. If you want to open a Costa Coffee, or a Domino’s shop down the street from the place where you are living, and have been accepted to the franchise program, the next thing you need to look at is the franchise agreement.
What is a franchise agreement?
In a franchise agreement, the franchisor (e.g., Costa Coffee) will appoint the franchisee (you) to run a franchise business (the Costa Coffee shop) in one or some certain location(s). What it means to you is that you have the rights to operate the franchise business, use the logos of franchisor, training, products from franchisor, and other benefit depending on specific franchise program. In exchange for those benefits, you would have to pay franchisor certain fees to join the program and a proportion of turnover each year.
These agreements are not just for large well-known brands, they can be used by you or your business in your expansion and is a great tool to understand each party’s responsibilities from the offset.
What you need to look at when you sign the franchise agreement
The term (duration) of the franchise agreement
Normally, the term of a franchise agreement will be a fixed period from the effective date, unless the agreement is terminated before that. You should be aware of whether there is a notice period to renew the agreement, and there is any renewal fee.
The rights the franchisor grants to the franchisee
This is one of the most important clauses in a franchise agreement. Normally, the franchisor will grant you (the franchisee) the right to operate the business and the right to use other intellectual properties.
Depending on the bargaining power of each party, you and the franchisor can negotiate on further terms and conditions, for example, the exclusive rights to run the franchise business, the lease of premises, the right regarding the customer base.
Fees that you have to pay to the franchisor
This section should be plain and clear about what types of fees and how much you have to pay the franchisor.
Further, both parties should agree on the calculation method for the fees, the payment schedule, the applicable interest.
The key obligations of the franchisee and franchisor
A franchise agreement with a well-known franchisor may be complicated and imposes many obligations, either expressly or impliedly on both parties. It is sometimes difficult to spot all of them, but you wouldn’t want to miss some key obligations.
On one hand, some of the main obligations of the franchisor are providing the franchisee training, necessary guidance and manual, reasonable assistance and advice, promotion and marketing, etc.
On the other hand, as a franchisee, you also have to comply with certain obligations such as paying the fees, completing the training, meet the sales target, etc.
In fact, the franchisor often imposes a lot more obligations on the franchisee. Therefore, before singing the franchise agreement, you should check those obligations carefully to make sure you can comply with them in the future.
Sale of the franchise business
Imagine you have been running the franchise business successfully for 4 years and you want to sell it to someone else. Are you allowed to sell it?
The answer is yes, but it is not as easy as selling normal business. With franchise business, normally, you have to acquire the Franchisor’s consent prior to selling the business. Further, it also subjects to the satisfaction of certain conditions such as the buyer’s eligibility, the Franchisee’s waiver of the option to buy the franchise business, etc.
At NIDO, with years of experience in drafting and advising on all kinds of commercial contracts, we are confident that we can provide advice and assistance covering all possibilities that you need to have in mind when you enter into franchise agreement.
If you are a business who has a potential franchisee and wish to have an agreement drafted to suit your business you could contact us for help right from the beginning.
If you are an individual who has found an opportunity with a business and want us to advise you on the agreement that may have been given to you by the Franchisor then again you should contact us so that we can guide you from the offset so that you have no surprises once you have started to operate the business.