I Am Signing a Franchise Agreement. What Should I Know?

Signing a franchise agreement in England and Wales can be a convoluted and confusing process for potential franchisees. Franchise agreements usually come in the form of lengthy legal documents accompanied by a franchise disclosure document. Additionally, navigating all of the legal and commercial terms is no easy task. However, there are some key points and themes to keep in mind as you read through your franchise agreement. This article will outline some of those key points and offer guidance on the process of signing a franchise agreement. 

What is a Franchise Agreement?

A franchise agreement will be entered into if you want to become a franchisee of a franchise business. The franchise agreement itself will contain the commercial and legal relationship between the franchisor and the franchisee. This might include, for example, your obligations as a franchisee to:

• pay the franchise fee;
• deliver on performance criteria; and
• operate your business in a certain area.

Similarly, it might include the franchisor’s obligation to:

• provide equipment;
• organise marketing arrangements;
• provide assistance and support; and
• deal with client enquiries.

What is a Franchise Disclosure Document?

The franchise disclosure document will usually come with the franchise agreement. This is a legal document outlining some key points you should know before going into a franchise agreement. In particular, it will touch on 23 main points, which will include:

• franchise fees;
• whether the franchisor will have a legal obligation to be involved in the actual operation of your business; and
• financial statements from the franchisor.

The franchise disclosure document can also include details on:

• the franchisor’s trade mark and intellectual property;
• the franchise relationship;
• the franchisor’s standards; and 
• your future access to a potential operations manual. 

These key provisions will be important for carving out your future business plans as they also touch on the legal terms on which you will enter your franchise agreement. 

What Should I Keep in Mind When Assessing These Documents?

When you are assessing the franchise agreement and franchise disclosure document, you should keep in mind some key points, for example:

What Are the Franchise Fees Which I Will Have to Pay?

The franchise fee will include the initial fee that you pay as part of your franchise agreement. Additionally, it includes ongoing fees and obligations, such as royalties. For your franchise agreement to be in your interest, the franchise fees should be outweighed by the benefits of your franchise agreement. 

What Are the Benefits That I Will Receive as Part of the Franchise Agreement?

The reason you would enter into a franchise agreement in the first place is because it allows you to run a business with an established business model. Generally, this provides a higher chance of success. However, it should be profitable for you in the long term, given the franchise fees. 

The agreement can also be beneficial for many other reasons. For example, the franchise agreement may give you access to:

• an operations manual of the franchise business. This could be very beneficial if the franchisor has access to valuable information, such as about the business’ industry;
• a trade mark, such as the franchisor’s brand or image. As the franchise is an established brand, you save yourself the cost of developing your own brand; and
• the franchisor’s involvement in the operation of your business. This could be valuable in a number of ways. For example, the franchisor may give you access to their supply chains or their products. This could potentially cut costs for your business. Further, if the franchisor has expertise in running certain businesses, they could use this to make your business appealing to customers. 

What Should I Know Before Signing?

Given all of this, there are some key things to know before signing. 

First, you should know the benefits you will receive and whether those benefits outweigh the franchise fees. As part of this, you should know the payment terms and how the franchisor can help your business. 

Second, you should know your legal obligations to the franchisor. You should seek legal advice to understand the details of your legal obligations fully. A franchise opportunity can seem like a good way of running a business, but you should make sure that you do not agree to obligations that are difficult to keep in the long term.

Finally, you should also know whether the franchisor is in any legal disputes that can affect your business. Again, they should disclose this in the franchise disclosure document.

Key Takeaways

Before you sign a franchise agreement, you should know your commercial and legal obligations to the franchisor. This will determine your relationship in the future. It will also be important for assessing whether a franchise agreement is right for your business. The benefits of signing the franchise agreement should outweigh the costs. Therefore, you should know exactly what the franchisor is offering you, as well as your payment terms.

For help regarding franchise agreements, LegalVision’s franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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