Franchise Agreements...
Where are the hooks? (part 3)

by Vanessa Cathie

Selling The Franchise

As a franchisee, your rights to sell the business are limited. The franchisee will probably have to give the franchisor the first right to buy the business, which in itself can undermine the value of that business and the goodwill for a selling franchisee.

If the franchisor chooses not to purchase, the franchisor will strictly control the sale process. The franchisor has invested time and money in choosing the right franchisee and therefore will be insisting that any sale process is subject to stringent checks by the franchisor. Most franchise agreements will include a provision that the incoming purchaser must be approved by the franchisor at the franchisor's sole discretion.

This supports the underlying concept that good franchise systems are based on good relationships. Since the franchisor will be the party having the relationship with the buyer, it is reasonable to allow the franchisor the right to approve that buyer (on this point, most franchisors would agree that when faced with two potential franchisees, one of whom has much experience in the particular trade while the other has no experience but a compatible personality, the franchisor would choose the personality every time).

Most agreements will include a 'transfer fee' which the franchisee will need to pay to the franchisor when a sale takes place. This is intended to cover the franchisor's costs involved in training the incoming franchisee, and should not be an opportunity for the franchisor to make a quick profit on the way through!

What Other Things Should My Lawyer Insist Upon?

So what sort of things should the franchise agreement contain to protect the franchisee? There are some important considerations that are often overlooked and this list is by no means exhaustive:

a) Back-up assistance and guidance are essential to the operation of a successful franchise. Details of the support and training to be provided by the franchisor need to be recorded in the agreement. This includes both initial and ongoing assistance. As well as having your lawyer peruse the agreement for these provisions, talk to existing franchisees about the level of support they have received.

b) Check out the financial projections very carefully in the agreement and the minimum performance standards. Many franchise agreements include the provision that if a franchisee does not meet the minimum performance standards, the franchisor has the automatic right of termination without notice. It is important the franchisee realises that despite these minimum performance standards, the franchisor is probably not providing any guarantees that those sorts of projections can in fact even be met. The same applies to financial projections which should be treated with a grain of salt. Franchise projections ought to state the assumptions upon which they are based so that a franchisee can distinguish his or her proposed franchise territory from that represented by the projections.

c) Many franchisees are induced into entering into a franchise on the basis of a number of pre-contractual representations as to turnover or otherwise. It is important that franchisees incorporate these provisions into the franchise agreement itself or in some written form.

d) Is the trademark registered? Registration gives exclusive rights to the use of the trademark and will deter unauthorised people from using or abusing the franchise's image. Don't forget that a franchise premium goes some way towards paying for the goodwill of the brand. The last thing that a franchisee needs is to find out, some months after signing, that there is insufficient intellectual property protection - that is, protection of the trade mark, logo, domain name or trade name.

Having outlined some of the issues to watch out for when considering a franchise agreement, hopefully you're still reading and haven't been put off. It is well-recognised that the chance of a franchise business still being up and running after 2 years is far greater than if an operator were to enter into a new business as a sole-trader or single-person company. The statistics show that franchising can and does work very well.

It should be every franchisor and franchisee's aim that any agreement, once signed, will be filed away in the bottom drawer and never formally referred to again. Whatever the black and white contract says can, of course, be tempered as long as the franchisor and franchisee are working well together, supporting the other franchisees and developing the system as a whole.

However, it is well worth investing in having a franchise-savvy lawyer review and comment on the agreement. Unfortunately, too many people mistakenly still see lawyers as deal breakers rather than deal makers and, combined with the threat of legal fees, a franchisee may choose either not to have the agreement reviewed at all, or to take the agreement to a general legal practitioner who in many cases has little practical franchising experience.

The sort of money involved in funding legal costs is minimal compared with the outlay that a franchisee could face if he or she finds themselves on the receiving end of a disenchanted franchisor who could be acting perfectly legally (albeit, in the franchisee's eyes, unreasonably) under the provisions of the franchise agreement.

No one likes nasty surprises six months down the track. However, if your lawyer adequately explains the requirements of the agreement to you at the outset, both parties can then get on with the business of doing whatever it is you want to do!

Supplied by Vanessa Cathie, a franchise specialist and consultant at Asco Legal, Auckland, acting for franchisees and franchisors.

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