A franchise agreement is a bit like an antenuptial agreement, you only review it when you want to get divorced! If the relationship breaks down totally or a franchisee is not compliant with the franchise system despite numerous conversations and warnings, you want to be able to exit the relationship and have your rights as a franchisor protected.
The franchise agreement defines the legal relationship between franchisor and franchisee and covers aspects such as rights granted, term of the agreement and the applicable fees to be paid. Although there is no specific law or registration requirements applicable to franchising, a franchise agreement should be compliant with the Consumer Protection Act (CPA) and the regulations within the Act that are applicable to franchising. The agreement should also take certain aspects of the Competition Act into account.
We must note that offering a disclosure document is a legal requirement of the CPA and that it should be presented to a potential franchisee to consider along with the franchise agreement for a period of 14 days before signature of the agreement to be compliant with the CPA.
Many franchisors see the franchise agreement as a legal document only. However, it also outlines the commercial relationship with the franchisee in terms of roles, responsibilities and applicable fee payments. There will also be certain aspects that are very specific to the particular franchise and how the commercial relationship works. For that reason, we believe it’s important to do strategic planning first before having the franchise agreement done, to ensure that the whole commercial picture is considered and reflected in the franchise agreement.
The need for an attorney
We have seen some franchises over the years with franchise agreements they copied from other franchises, or worse, the internet! While it’s possible to draw up and sign an agreement like this, it mostly likely will not be compliant with CPA requirements or other aspects that deserve legal expertise. We strongly recommend using an attorney that specialises in franchising, especially since this attorney will defend the agreement, should it ever go to court. The attorney will also be able to provide advice in case the franchisor has to de-franchise a franchisee.
As franchise consultants, we look at the practical and commercial considerations of the franchise agreement and assist our clients by writing a commercial brief with principles to incorporate into the franchise agreement. Some of the practical considerations include:
- Charging a minimum royalty by debit order to ensure head office has adequate cash flow
- Clauses that prevent speculative selling of the franchise
- Renewal considerations
- Providing for variable upfront fees that are market and area related
If you would like to have a conversation about your franchise agreement or your franchise documentation