A franchise involves the right of one party (franchisee) to use an existing business model and brand of another party (franchisor).  A franchise relationship will require the signing of a franchise agreement, a contract that governs the rights and duties of both parties.  Franchise Agreements may regulate business aspects such as advertising, signage, pricing, store design, store location, etc.

Each franchise agreement is specific to the business being franchised and they can vary greatly from company to company.

Franchise agreements generally favour the franchisor but they are somewhat regulated by the Consumer Protection Act (“CPA”) which affords the franchisee some protection; there are also calls for further regulation in respect of the franchises which, as of 2016, has yet to be finalised.

Below we list some of the common clause fairly specific to franchises you are likely to find in a franchise agreement.

Royalty Fees

Royalties, in the context of a franchise, are fees paid by the franchisee to the franchisor. This amount is usually based on the income from sales in the franchisee’s business over a particular period (e.g. per week; per monthly, quarterly).

Products

In many cases, the franchisee will not have control over the products sold in the franchise business.  This may seem obvious, as part of the reason one engages a franchise is to use their products but this can be restricting as the business progresses.

The purpose of such a control is, among other things, to ensure that the third party experience of the franchise is uniform.

A franchise agreement will often also require that the products (or a product’s constituent parts) sold in the franchise business are sourced from the franchisor or an authorised supplier; such a requirement is no longer strictly lawful in light of the CPA, which allows franchisees to source products from any supplier provided the product is the same standard and quality as the franchisor’s or the franchisor’s authorised suppliers.

Operations

The method of operating a franchise is usually stated in detail in a franchise agreement, included are advertising requirements, pricing, business systems, point-of-sale programs, design, etc.

Location

A franchise agreement may stipulate the location of a franchise business or require approval for a potential location before starting a business.  There could also be restrictions on location, as other franchisees may already have exclusive rights in a particular area.

Relocating a franchise store is often not an option.

Duration

Franchise agreements are usually valid for a fixed period.  Upon expiry, a franchisor may choose to renew the franchise agreement; this can be prejudicial to the franchisee, so it is recommended that the franchisee incorporates renewal terms into the original franchise agreement.

Restraint of trade

It is quite common to find a restraint of trade in a franchise agreement, which restraint should serve to protect the franchise and its good name.

As always with restraints of trade, they should not be too restrictive on the franchisee.

Insurance

Some franchise agreements will require the franchisee to maintain insurance in respect of certain kinds of loss (e.g. fire, theft, third party liability, etc).  Such a clause usually benefits both parties but it can be onerous on the franchisee, particularly, in respect of expense, so it is advisable to cost the insurance required and include it in your financial forecasts, business plans, etc.

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