Carried out correctly, franchising can be a powerful engine for business growth and global expansion. Take Marriott Hotels, for instance. This month, the hotel chain signed franchise agreements for 84 properties in Europe, while adding more than 50 new properties across its portfolio of brands.
But it’s not just the hospitality sector that can benefit. According to recent findings from the BFA, franchising is growing exponentially: in 2019, franchisees across the country are reporting 93% profitability and 6 in 10 franchised units turn over more than £250,000. Their research confirms that UK’s franchise sector is now worth over £17bn to the economy; up over £2bn since 2015.
In line with the industry code of ethics, a good franchise agreement should clearly set out the period of the franchise; it should stipulate the rights and obligations of the franchisor as well as the franchisee and detail the conditions that will allow you to grow the franchise. But beware: the franchise agreement you sign is legally binding, wide-ranging and can survive for the duration of a business. With this in mind, the importance of a well-drafted agreement cannot be overstated.
The principle matters your franchise agreement should address include:
Your franchise agreement should clearly state the geographic territory in which the franchisee is free to operate. This will dictate where the franchisee is able to establish outlets and where they can advertise on behalf of those outlets. The grant of territory could be exclusive within a particular territory, but if the territory rights granted are non-exclusive, the franchisee will share the territory with other franchisees. It’s essential for all parties involved to understand the commercial, political and cultural factors which could affect the franchise and its development plans within a particular territory. Without a detailed plan of action that take resources, skills and potential barriers into account, you might run in to trouble later down the line.
Terms and renewal
A typical franchise agreement will have an initial term of five to ten years, though longer periods are not uncommon in international agreements. When it comes to the length and duration of your contract, the franchisee will likely seek a period that is long enough for them to maximise the return on their investment. Certain jurisdictions place a cap on the maximum term that can be agreed, but provided sales targets are met, you may find a longer period beneficial in providing stability and reducing the need for management involvement on your end.
Under a franchise agreement, the franchisee will be granted the right to use the intellectual property of the franchisor through a transfer of IP rights. In almost every case, trademark rights are transferred such as the use of the trade name, symbol and logo, but patent rights may also be transferred as part of the agreement. Finally, the franchisee is granted through the license the ability to access and use confidential know-how and certain trade secrets – the recipe for KFC gravy, or the secret formula for Coca Cola, for example. Such provisions must be drafted with care, and the license should always be limited to a specific duration.
Generally speaking, franchising fees will usually be levied as an upfront payment and an ongoing fee for the use of intellectual property rights which will be based on a percentage of the franchisee’s sales volume.
Getting both parties’ obligations in writing is essential in minimising the risk of disputes – as such, they should be clearly set out in detail and include certain key areas. For the franchisor, obligations will typically include the provision of training, technical support, publicity, regular monitoring and communicating developments in the strategy. For the franchisee, gaining a clear understanding as early as possible as to how much effort is to be devoted to the franchise as well as the conditions precedent to trading such as recruitment and finding office is key in ensuring all parties are on the same page. Licensing and confidentiality obligations along with non-compete clauses should be stipulated within the agreement as well as the exit terms for the franchisor.
As with any legally binding contract, seeking specialist advice from a specialist lawyer can provide you with the peace of mind that your franchise agreement is watertight, reflects your commercial interests and leaves no room for potential difficulties or disputes. For more guidance on franchising, get in touch with the team at 360 Business Law today.