FRANCHISING

What Is Franchising?

Franchising is one of three business strategies a company may use in capturing market share.

The others are company owned units or a combination of company owned and franchised

units.

Franchising is a business strategy for getting and keeping customers. It is a marketing system

for creating an image in the minds of current and future customers about how the company's

products and services can help them. It is a method for distributing products and services that

satisfy customer needs.

Franchising is a network of interdependent business relationships that allows a number of

people to share:

A brand identification

A successful method of doing business

A proven marketing and distribution system

In short, franchising is a strategic alliance between groups of people who have specific

relationships and responsibilities with a common goal to dominate markets, i.e., to get and

keep more customers than their competitors.

There are many misconceptions about franchising, but probably the most widely held is that

you as a franchisee are "buying a franchise." In reality you are investing your assets in a

system to utilize the brand name, operating system and ongoing support. You and everyone in

the system are licensed to use the brand name and operating system.

The business relationship is a joint commitment by all franchisees to get and keep customers.

Legally you are bound to get and keep them using the prescribed marketing and operating

systems of the franchisor.

To be successful in franchising you must understand the business and legal ramifications of

your relationship with the franchisor and all the franchisees. Your focus must be on working

with other franchisees and company managers to market the brand, and fully use the

operating system to get and keep customers.

Throughout this article we will discuss in detail some of the benefits of conducting business

as part of a larger group.

Other franchisees and company operated units are not your competition. The opposite is true.

They and you share the task of establishing the brand as the dominant brand in all markets

entered and reinforcing the customers's familiarity with and trust in the brand. So in this

respect you are working as a team with others in the system. Other franchisees share with you

the responsibility for quality, consistency, convenience, and other factors that define your

franchise and insures repeat business for everyone. Increasing the value of the brand name is

a shared responsibility of the franchisor and franchisee.

An "ownership mentality" destroys the reason franchised and company-operated units are

successful. Think about it. If you think you "bought" a franchise, you become an "owner" and

begin to think and act like an owner. You will want to change the system because of your

needs, you will wonder what you are paying the royalty for, and you will begin thinking of

other franchisees as your competitors. For these and many other reasons you do not want to

think of yourself as an "independent owner."

As a franchisee you own the assets of your company, which you have chosen to invest in

someone else's brand and operating system and ongoing support. You own the assets of your

company, but you are licensed to operate someone else's business system.

Finally, your desire to become a franchisee must be grounded in your belief that you can be

more successful using someone else's brand and operating according to their systems and

methods, than you could if you opened up your own independent business and competed

against them. You want to look for a franchisor who is building a system of interdependent

franchisees who are committed to getting and keeping customers, to growing faster than the

market, to growing faster than the competitors, and to do all of that with high margins. When

you discover a franchisor who understands this relationship, you have a franchisor worth your

consideration.

The franchise agreement is the cornerstone document of the franchisee--franchiser relationship. It is this document that is legally binding on both parties, laying out the rights and obligations of each. A sample agreement may either be attached to the disclosure statement or presented separately. Either way, you are entitled to receive it as a prospective franchisee five business days before signature. You should have it reviewed by a lawyer familiar with franchise matters--especially since most agreements are extremely one-sided in favor of the franchiser. No one should enter into a franchise and expect to have an evenly drawn contract.

The agreement will contain provisions covering, in considerable detail,

the obligations of the franchiser (the company) and franchisee (you) regarding operating the business;

the training and operational support the franchiser will provide (and at what cost); your territory and any exclusivity;

the initial duration of the franchise and any renewal rights; how much you must invest; how you must deal with things such as trademarks,

patents and signs; what royalties and service fees you will pay; tax issues; what happens if you should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; by the company, operating practices, cancellation, and attorney fees.

There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.

The Basics of Franchising

By: Eddy Goldberg

Franchising is a business model that combines the best aspects of sole proprietorship and

Corporate America. It can be described as a "hybrid" model that fills the gap between

working for somebody else (whether a large corporation or a small business) and working for

yourself.

Franchising is not an industry in itself. Rather, it's a way of doing business that can be applied

in almost any sector. Today about 3,000 established franchise brands operate in nearly 250

different lines of business in the U.S.

Franchising has two main forms.

In product/trade name franchising, a franchisor owns the right to a name or trademark

and sells or licenses the right to use that name or trademark.

Business format franchising, the type discussed here, involves a more complex

relationship in which the franchisor provides franchisees with a full range of services

and support, and franchisees sign an agreement to conduct operations in conformity

with specific rules laid out by the franchisor.

According to the International Franchise Association, "Franchising is a method of

distributing products or services. At least two levels of people are involved in a

franchise system:

1) the franchisor, who lends his trademark or trade name and a business system; and

2) the franchisee, who pays a royalty and often an initial fee for the right to do

business under the franchisor's name and system."

Franchising is a team effort. For any franchisor to succeed, the vast majority of its

franchisees (all, ideally) must operate profitable individual franchise units over the

long term. A brand's success depends on an ongoing partnership between franchisor

and franchisee. One of the most common sayings in franchising is: "Franchising

means working for yourself, but not by yourself."

For many, franchising's greatest appeal is the opportunity for an individual to control

their destiny and secure their future. In its earlier days, franchising was a way for an

independent-minded business person to "buy a job" - a sandwich shop or a home

repair service, for example, and showing up every day as a hands-on operator.

In recent years, the franchise model has caught on as an attractive business

opportunity for wealthier individuals and investors who buy many units at once; or

who buy the rights to develop a geographical area or "territory" and develop a certain

number of units within a specified timeframe. These multi-unit owners, area

developers, or area representatives (some of whom also recruit new franchisees and

support them within their territory) are part of a growing trend in franchising, and

account for about 50 percent of all franchised units in the U.S. today.

"Multi-brand" franchisees are also on the rise. These franchisees operate different

brands under a single organization, creating efficiencies, economies of scale, and

market penetration to increase sales and profitability. The primary reasons successful

franchisees seek additional brands are

1) they have "built out" their territory for their current brand, and/or

2) they are seeking a new, complementary brand to smooth out the ups and downs of

business or seasonal cycles.

Franchisors, too, are combining several different brands under one roof, and

frequently offer discounts to current franchisees who take on a second (or third)

brand.

"Co-branding," in which a franchisee operates two brands from the same location, is

another recent trend. Co-branding saves on real estate or leasing costs, allowing more

profit per square foot and often balancing out day parts (breakfast, lunch, dinner). An

increasing number of franchisors now offer several different brands, and often provide

incentives to franchisees to co-brand.

Much of what prospective franchisees are seeking to buy in a franchise brand is peace

of mind. They want to know, with as much certainty as possible, that if:

1) the franchise opportunity is presented accurately and realistically by the franchisor;

2) they take the time to perform "due diligence" by speaking with current franchisees,

reading the Franchise Disclosure Document (FDD) carefully with the aid of an

experienced franchise attorney;

3) after comparing the brand and sector under consideration with the competition

(franchised or not); then

4) their chances of making money and building a successful business are better than if

they started a business from scratch.

Yet for many aspiring entrepreneurs looking at the franchise business model for the

first time - especially those coming from a corporate background - the business

proposition can seem ludicrous: "Why should I pay tens of thousands of dollars before

I even start, and then 8 or 10 percent off the top every month for 10 or 15 years?"

For those who investigate further, the answer is clear: they can make more money

faster through franchising than on their own; and they realize the potential for a

greater long-term return on their investment as well -- despite paying an up-front

franchise fee and a percentage each month of gross sales for "royalties" and a

company-wide advertising/marketing fund. Franchise fees range from a few thousand

dollars to tens of thousands, depending on the concept, while royalties generally run 5

to 8 percent and the marketing/advertising fund an additional 1 to 3 percent.

Legally, franchisees do not "own" the franchise they "buy." They are granted, or

awarded, a license that gives them the right to operate and manage their franchise

business. However, franchisees do own the assets of their company, and as long as

they adhere to the franchise agreement have specific rights under state and federal

law. Franchisees can form franchisee associations that can participate in corporate

decision-making if the franchisor is amenable, or band together to oppose decisions

they see as detrimental to their operation and the brand in general.

Introduction

Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn't have a specific business idea or prefers the security provided by an established concept.

The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the business offering you the franchise, and they give you help and support.

Successful franchises have a much lower failure rate than completely new businesses. However, you will still need to work hard to make the franchise a success and you may have to sacrifice some of your own business ideas to fit in with the franchisor's terms.

This guide will help you decide whether franchising is for you. It shows how you can find the right franchise, and highlights the key issues you need to consider.

What is franchising?

The term 'franchising' can describe some very different business arrangements. It is important to understand exactly what you're being offered.

Business format franchise

This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.

The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name, and benefits from the franchisor's help and support.

In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.

The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod and McDonald's.

Other types of arrangement

Different types of sales relationships are also sometimes referred to as franchises. For example:

Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.

Agency - you sell goods or services on behalf of the supplier.

Licensee - you have a licence giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.

Multi-level marketing

Some businesses offer franchises that are really multi-level marketing schemes. This is where self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit. (GNLD)

Advantages and Disadvantages of Franchising

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.

You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.

The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.

You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.

Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.

You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.

Relationships with suppliers have already been established.

Disadvantages

Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.

The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.

The franchisor might go out of business.

Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough

You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.

All profits (a percentage of sales) are usually shared with the franchisor

Tips on franchise agreements

The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from an experienced franchise solicitor accredited by the British Franchise Association. Get a specimen contract for them to review.

Areas covered by a typical agreement

Term - how long does the franchise last? Will you have the option to renew it, and on what terms?

Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?

Fees - what initial fee will you pay? What percentage of sales revenue will you pay? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?

Support - how much help will you get starting the business? What continuing support will you get?

Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?

Exit - what happens if you can't continue in the business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?

The Franchise Agreement

A franchise agreement should achieve three fundamental objectives

FIRST – Given the absence of specific franchise legislation, it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon. (CONTRACT)

SECOND – It should seek to protect for the benefit both of the franchisor and the franchisee, the franchisor's intellectual property.(IP CLAUSE)

THIRD – It should clearly set out the rules to be observed by the parties.

1. The Terms

As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee and the relationship between them. In this respect the franchise agreement can be said to form the 'engine room' of the whole transaction. If difficulties should arise between the franchisor and the franchisee they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.

What, then, should one look for in a franchise agreement?

A franchisee will look for promises:

To train the franchisee and his staff To supply goods and / or services

To be responsible for advertising, marketing and promotions

To assist the franchisee to locate and acquire property and have it fitted out and converted into a franchised outlet. (Similar considerations apply with regard to the acquisition of vehicles, fitting them out, equipping the franchisee etc.)

To assist the franchisee to set up in business

To improve, enhance and develop the business system

To provide certain support management and possibly accounting services

Franchisors will be anxious to ensure that the franchise agreement clearly sets out the obligations of the franchisee. A franchisor will therefore wish to:

Monitor the performance of the franchisee Protect himself from unfair competition

Protect his intellectual property

Impose obligations and restrictions on the franchisee with regard to the exercise of the rights granted by him to the franchisee

2. The Intellectual Property

These are in the nature of:

Trade Name Goodwill

Trade Marks

Confidential Information and know-how (TRADE SECRETS)

Copyright

NOTE: Unless the franchise agreement contains sufficient safeguards to protect the franchisors intellectual property rights, the franchisor may find that he is unable to prevent infringement of his rights by a third party or an ex-franchisee.

Franchisors should be aware that it is not only in the interests of the franchisor that these rights be protected. Franchisees are equally concerned to ensure that the franchisor had done everything that is reasonably possible for him to protect the intellectual property rights in question. Many franchisees purchase a particular franchise because of the high profile a franchise enjoys in the market place. In many cases, a franchisee has the choice of which franchise to purchase in the same market sector and one of the reasons why a franchisee will have chosen a particular franchise is because of its strong brand image. It follows therefore that the franchisee will be anxious to ensure that in the event of infringement, the franchisor has taken sufficient steps to safeguard his ownership in his intellectual property rights so that he can stop infringement and thereby protect the reputation of that brand name both for himself and for his franchise network. If the contract is weak on this point, franchisees will not consider that particular franchise to be a sound investment proposition because the franchisor will be limited in what he can do to prevent a 'copy cat' operation from being set up in direct unfair competition with a franchisee.

Brand names and trademarks are becoming increasingly important to business; they can increase the asset value of a company and therefore need to be adequately protected. The franchise agreement should therefore not only grant relevant rights to the franchisee and reserve rights for the franchisor, but should also contain mechanisms necessary for protecting the franchisors intellectual rights from infringement.

3. The Rules

All franchisees should be treated as a family and, as such, there should be no room for favourites. This means that the franchise agreement should be in a standard form with all prospective franchisees being offered the same terms with no special deals being done. If a franchise agreement is to be non-negotiable then it is important, from the franchisees point of view, that is well balanced in terms of rights and obligations of the parties and takes into consideration the franchisees concerns also.

NOTE: Again, in the absence of legislation or regulation, which tells the franchisor and franchisee what to do and how to behave, and given that franchisors and franchisees perceive the franchise relationship to be a long term one, it is important that the contract spells out very clearly what is expected and of each party to the contract.

The franchise agreement should therefore clearly:

Specify in detail the duties and obligations both of the franchisor and of the franchisee State the grounds upon which the franchisor will seek to terminate the franchise

agreement

Deal with the payment of franchise fees and the timing of those payments

Set out the consequences of such termination

Some thought has to be given to the franchisees and their objectives and provision should therefore be made in the franchise agreement to deal with what is to happen should the franchisee die or become permanently incapacitated.

It is also advisable to deal with the question of what is to happen if a franchisee wishes to sell his business during the term of his franchise agreement. Here, as in other matters, a balance has to be struck between the need of the franchisee to realise his investment as and when he wants to and the requirement of the franchisor to approve those coming into the franchise network and to prevent those leaving the network (for whatever reason) from continuing to use the franchisors trade secrets and competing unfairly.

NOTE: THE TERMINATION CLAUSE SHOULD PROVIDE FOR IP, TRADE SECRETS AND APPROVAL BY THE FRANCHISOR.

The franchise transaction is complex and the franchise agreement must respect that complexity. Experience has shown that those franchisors who take the matter of the franchise contract lightly pay dearly for their mistake. To the franchisee, the franchise contract represents an investment. His business depends upon it to the extent that his business may disappear should it terminate. For the franchisor, the franchise agreement is an income producing asset which will ultimately have a place on his balance sheet.

NOTE: If for any reason the franchise contract turns out to be defective, the cost to the franchisor can be the loss of his whole network (given that the franchise agreement is in a standard form). Although it may be tempting for both franchisor and franchisee to rely on goodwill, ultimately it is only the contract that matters.

Whatever the size or reputation of the franchisor, prospective franchisees will always look to the quality of the franchise agreement because they know that there may be a change of policy within the franchisor company or that the people running the franchise operation may change. They know that at the end of the day, all they can rely upon will be whatever rig

The Franchise Agreement - what's included

The essentials of a franchise agreement

A Franchise Agreement is a sophisticated form of Licence Agreement. It is therefore necessary to first look briefly at what a license is and what can be licensed.

A license agreement is a contractual business relationship between a licensor and licensee. The licensor is either the proprietor or a holder of certain intellectual property rights or technology, which he allows the licensee to use in return for some sort of remuneration or other advantage.(Permission to use)

Intellectual property rights that can be licensed include statutory or non-statutory intellectual property rights. Statutory intellectual property rights include patents, designs, trademarks and copyright whereas non-statutory intellectual property rights include

know-how, trade secrets, customer lists, formulas, business methods, personnel training and manuals.( Look at the Industrial Property Act)

The object of a license is almost invariably to commercially exploit technology or intellectual property. To ensure the long term success of a License Agreement, in other words, to achieve a win/win situation, the license must be structured in such a way that it is to the mutual benefit of both parties.

Types of franchises

Although it is often said that there are two main types of franchising, namely

(i) product and trademark or trade name franchising and

(ii) business format franchising, this is not an accurate explanation.

A more correct approach is to view a product or trademark franchise, as franchising in a simpler form in that the franchisee is only entitled to use the franchisor’s name or trademark and product. This type of franchising is prevalent amongst motor vehicle dealers, soft drink bottlers and certain fuel service stations. Thus in a product or trademark franchise only a single or a limited number of intellectual property rights are used.

The opposite end of the scale is a full business format franchise in terms of which the franchisee uses the franchisor’s entire business concept, which includes the name, trademarks, copyright, goodwill, know-how, trade secrets, trade dress and similar intellectual property. It is clear that in a full business format franchise numerous intellectual property rights are licensed to the franchisee to use. The two customary “types” of franchises are therefore at opposite ends of a continuum. It is of course for the franchisor or proprietor of the intellectual property to decide precisely what makes commercial sense and what he is going to allow the franchisee to use.

Definition of franchising

The International Franchise Association (IFE) defines a full business format franchise as follows:

“A franchise operation is a contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain continuing interest in the business of the franchisee in such areas as know-how and training, wherein the franchisee operates under a common trademark, format or procedure owned or controlled by the franchisor, under which the franchisee has or will make a substantial capital investment in his business from his own resources.”

It is apparent that the key elements of the definition include:

(1) a contractual relationship, (2) the franchisor offers or is obliged to maintain a continuing interest in relation to the know-how and training,

(3) the franchisee operates under a common trademark, format or procedure, (4) owned or controlled by the franchisor, and (5) the franchisee has or will make a substantial capital investment from his own resources.

The licensing of intellectual property to the franchisee is a central theme of the Franchise Agreement. The three most important areas of intellectual property in most franchise systems are trademarks, copyright and know-how.

Trademarks

In terms of the Trademarks Act, a trademark includes any sign capable of being represented graphically including:

A device, logo or representation A name or signature

A word, words, phrase or slogan

A letter or series of letters

A numeral or series of numerals

The shape and configuration of a product or part thereof

The pattern and ornamentation appearing on a product, packaging or advertising materials

A colour or combination of colours

A container for goods

or any combination of the aforementioned.

It is often said that the cornerstone of the Trademarks Act is distinctiveness. To be capable of being registered and function as a trademark, the mark must distinguish the goods and services in relation to which it is used from the goods or services of others.

Copyright

The next important area of intellectual property is copyright. Copyright is the right given to the creator, author or other person who may own the copyright of certain types of works, not to have that work copied or reproduced without authorisation. Copyright exists in various types of works including literary works such as manuals, documents, articles, promotional materials, disclosure documents, novels and publications. Artistic works include logos, labels, menus, advertisements and diagrams. Computer programmes also enjoy copyright.

A critical point to remember is that generally the author of copyright work is also the owner thereof, unless the work was made by an employee during the course of his employment. In

this instance, the employee will be the author, but the employer will be the owner. It is therefore essential that copyright in all works including logos, promotional materials, company documentation and other works which are prepared externally or outsourced, even if they have been paid for, are competently transferred to the franchisor in writing. If this is not attended to, although the franchisor (and the network’s franchisees) will be able to use any such materials, the franchisor will not be the owner thereof.

Know-how

The term know-how usually refers to a wealth of technical knowledge, commercial information and experience developed and acquired by a specialised production organisation. It is often reduced to the form of an operating manual or reflected in similar documentation. Many of the success features of franchises reside in the know-how, trade secrets and confidential information.

Note: that if know-how or trade secrets are “leaked” or become public knowledge, it will no longer be possible to protect them and they may become valueless. Competent confidentiality provisions should therefore be included in the Franchise Agreement and/or in employment contracts.

Franchise Agreement Provisions

Next, we turn to the Franchise Agreement itself. Due to the nature and complexity of a Franchise Agreement, it is the intention in this article to only highlight a number of important clauses or provisions, which need to be considered when preparing or considering a Franchise Agreement.

Definitions

As in any other agreement, the parties must be properly identified and described. It is essential in a Franchise Agreement that the intellectual property being licensed is also properly identified and described in the Agreement. Definitions should therefore include the trademarks, copyright, trade dress, know-how, trade secrets and other intellectual property. The definitions should also include a description of the franchised business. Further, bearing in mind that the proprietor or holder of the intellectual property is allowing the franchisee to use the intellectual property, definitions should also be included as to precisely what intellectual property will be used in which territory and for what period. Provisions should therefore be included for inter alia the territory, commencement date, the termination date and renewal.

Grant clause

One of the most important terms in a Franchise Agreement is the grant clause. When considering this clause it should be borne in mind that there are various types of License Agreements. The first is an exclusive License or Franchise Agreement where certain intellectual property rights are given exclusively to a franchisee to use for example in a certain area. This franchisee will therefore be able to exclude all others including other franchisees and the franchisor from operating in that area. It should be borne in mind that where exclusive licenses are given, minimum performance standards or other safe guards should be put in place in the best interests of the franchise system.(Marks and Spencer)

The second type of License Agreement is that of a sole Franchise or License Agreement. Using the same example, in this instance the franchisee is given the sole right to operate a franchise or outlet in the specific area. This however, does not exclude the franchisor from opening one or more outlets and compete directly with the franchisee in that area.

Finally, there is an ordinary license or franchise. Under its terms, a franchisee is given the right to use the intellectual property, but enjoys no exclusive or sole rights whatsoever. For example if he is given an area within which to operate, the franchisor and other franchisees will also be entitled to operate in the same area.

Payment clause

The clauses relating to payment usually include at least three types of payment. These are the upfront lump sum, which is usually described as a franchise fee and which is paid to obtain the license or franchise. The breakdown of this amount usually includes the costs of setting up the outlet, costs of training, legal costs and an amount for goodwill. In newer franchises the amount attributed to goodwill is usually smaller, whereas in the more established franchises larger sums are requested for the established goodwill.

Ongoing fee payments are also made by the franchisee to the franchisor. These could be fixed monthly, quarterly or annually.( Royalties) Alternatively, amounts based on a percentage of turnovers are paid. These royalties are payable in lieu of the ongoing use of the intellectual property. The royalty figures have also been described as a management service payment, possibly to justify or to enhance the franchisee’s perception that he is also receiving management services from the franchisor.

It is common practice in full business format franchises, that each franchisee contributes a fixed amount or a fixed percentage of turnovers on a regular basis towards the promotion and advertisement of the franchise operation. These monies are preferably paid into an independently managed fund. This fund is usually managed by the franchisor in consultation with the franchisees.

In certain franchises, administration is attended to on behalf of the franchisees by the franchisor in return for which the franchisee may pay to the franchisor a fixed monthly sum or a small percentage of turnovers.

Franchisor obligations

The next essential part of the Agreement deals with the obligations of the franchisor. The franchisor’s obligations are divided into initial and ongoing obligations.

Initially the franchisor will assist with

the setting up of the premises or outlet,

furnish the franchisee with the operations and procedures manual,

disclose the entire franchise system to the franchisee and train the franchisee.

Ongoing obligations of the franchisor includes

additional necessary training from time to time and also to assist with problems,

management and

to provide guidance, in addition to the ongoing management and

development of the franchise system.

It is essential in the long-term best interests of the franchise system that the Agreement includes positive obligations and duties on the franchisor to render these services.

Franchisee obligations

The obligations of the franchisee are usually fairly extensive. These should include provisions to the effect that the franchisee

should operate the franchise strictly in accordance with the franchise system, usually as set out in the operations and procedures manual.

In addition to fairly standard terms such as for example an obligation to pay all sums due timeously and to

engage and properly train suitable staff, provisions should be inserted to the effect that the franchisee should

enhance and promote the intellectual property, goodwill and reputation of the franchise at all times. In addition, the franchisee should also

advertise and promote the franchise in accordance with the directions, requirements and specifications of the franchisor from time to time.

These provisions are essential to ensure a common brand, identity, consistency and quality. The franchisee should also in this regard

allow regular inspections to ensure quality control.

Where monies paid by the franchisee are calculated as a percentage of turnover, the franchisee will be obliged to

grant the franchisor full access to accounting records.

Ideally, a franchise system should have a comprehensive operating and procedures manual. This should be a dynamic annexure to the Franchise Agreement and the agreement should provide that the franchisee shall

act in accordance with the manual, as amended from time to time.

This will enable the franchisor, where it makes prudent commercial sense to develop the business, to do so without having to continually sign updated Franchise Agreements.

Assignment/Cession/Alienation of rights

The Agreement should contain a provision preventing the franchisee from ceding, assigning or in any way alienating any of his rights or sub-franchising without the written consent of the franchisor.

This is an added protection to the franchisor and greater franchise system in that it will prevent franchisees from selling or alienating their rights, thereby possibly introducing unskilled and inappropriate individuals as franchisees into the business.

Termination

The termination clause should be comprehensive in the best interests of the entire franchise system and/or other franchisees. In addition to standard provisions such as timeous payment, the clause should include provisions entitling the franchisor to cancel the Agreement if the franchisee

fails to act in accordance with the operations and procedures manual,

performs inadequately or maintains poor quality standards.

Further, if there is any challenge on the proprietorship of the franchised intellectual property, this should also be a ground for possible termination of the Agreement.

After termination

The Agreement should also provide for an after termination clause in terms of which the franchisor will be

entitled to after the termination of the contract to

retrieve all materials, documents, programmes and products bearing, reflecting or embodying the intellectual property of the franchisor or which is associated with the franchisor.

Restraint of trade

To protect the franchise system, it is advisable to insert restraint of trade provisions.

Note: These should be reasonable with regard to territory, nature of activity and period. Of concern here is that although it is often in the best interests of a franchise system to have all franchisees sign the same Franchise Agreement, this may not be appropriate in this instance.

For example, if a franchise system sells three sizes of franchisee outlets, it would be inappropriate to have the identical restraint of trade provisions in each instance. A restraint of trade provision could be quite reasonable in the instance of a multi-million rand franchisee outlet rendering services to clients from a large area, whereas the same provisions could be quite unreasonable when considered in the light of a far smaller franchisee outlet. If a court finds a restraint of trade provision “unreasonable”, it will be unenforceable. It is therefore prudent to rather include narrower or more reasonable restraints than broader restraints, which may be deemed unreasonable and therefore entirely unenforceable.

Consideration should also be given, wherever possible, to the protection of intellectual property rights, such as customer lists, know-how, trade secrets and confidential information, in this clause.

Disclosure

It is necessary for the franchisor to furnish the franchisee with a competent disclosure document at least 14 (fourteen) days prior to signature of the Agreement. It is advisable to include a provision in the Agreement confirming that:

the franchisee was furnished with the disclosure document more than 14 (fourteen) days before the date of signature

the franchisee is happy that he has been furnished with sufficient reasonable information to properly assess whether to buy the franchise or not.

Confidentiality

It is advisable that confidentiality agreements be signed by relevant staff in franchisee outlets to protect the know-how, trade secrets and confidential information of the franchise system. These clauses could also be inserted into employment contracts.

Suretyship (Not important for our purposes)

Where appropriate, members, shareholders of close corporations, companies or other corporate entities should be requested to sign suretyship agreements to make them personally liable and accountable to the franchisor.

Provisional period

In certain instances, it is advisable to consider the inclusion into the Agreement of a provisional period of for example six months during which the franchisor will be able to terminate the agreement relatively easily if the franchisee does not achieve and maintain certain objectives and standards. This is an additional clause to fall back on, as it is often difficult to assess from the initial interview and a few contacts with the franchisee whether he will turn out to be a competent and successful franchisee.

Conclusion

In conclusion, it needs to be reiterated that it is essential that the Agreement properly identifies all aspects of the franchisor’s intellectual property and other proprietary rights and that these are properly protected and licensed to the franchisee. The contract should also focus on and accommodate the specific needs and requirements of the franchise operation and control the relationship between the parties in a positive and constructive manner.

Finally, a competent written Franchise Agreement is a key factor to promote and enhance a win/win situation and to protect the respective rights of the parties and the entire franchise operation. It is therefore certainly advisable, particularly as franchise agreements are extremely complex, that legal assistance from an expert skilled in intellectual property and franchising be obtained.

Ten Key Provisions of Franchise Agreements

The Franchise Agreement is the legal document that governs the franchisee/franchisor relationship. There is no standard format for a Franchise Agreement because the terms and conditions and operations vary from franchise to franchise and industry to industry. In general, Franchise Agreements cover the following main provisions:

1. Training and/or ongoing support provided by the franchisor. Each franchisor has its own training program for franchisees and their staff, which can include training done at the franchisee's location or at the corporate headquarters or a combination. Most franchisors offer ongoing support including administrative and technical support.

2. Assigned territory. Your Franchise Agreement will designate the territory in which you will operate and whether or not you have exclusivity rights.

3. Duration of the Franchise Agreement. This provision states the length of the agreement.

4. Franchise fee and total anticipated investment. Franchisees are required to pay an initial franchise fee that grants them the right to use the franchisor's trademark and operating system.

5. Trademark, Patent, and Signage use. This provision covers how a franchisee can use the franchisor's trademark, patent and signage.

6. Royalties and other fees you are expected to pay. Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, typically on a monthly basis.

7. Advertising. The franchisor will reveal its advertising commitment and what fees franchisees are required to pay towards those costs.

8. Operating protocol. This section details how franchisees run their outlets.

9. Renewal rights and franchisee termination/cancellation policies. These provisions deal with how the franchise can be renewed or terminated. Some franchisors have an Arbitration Clause in the Franchise Agreement, which means that if legal action on either side is warranted, an arbitrator will review the case instead of going to court.

10. Resale rights. Some franchisors allow franchisees to sell their franchises for whatever reason. Many, however, write in buy back or right of first refusal clauses, which allow the franchisor to buy back the franchise at a rate determined by them or to match any potential buyer's offer who has expressed interest in buying your franchise