Franchising is an enduringly popular way to enjoy the benefits of running an established business, particularly in certain sectors such as food and retail. They allow business owners to capitalise on the existing goodwill of a brand, whilst offering established companies the opportunity to enter new markets.
Restrictive covenants
Restrictive covenants in franchise agreements typically prevent the franchisee from operating or being otherwise involved in any business that is likely to compete with the franchise. They are an important tool for affording the franchisor security that their commitment to the franchise will not be undermined by internal competition.
Franchisors should ensure that they clearly define what a competitive business is and that they are protected for the duration of the agreement and for a certain period following termination, particularly if the agreement ends due to wrongdoing by the franchisee.
Franchisees should ensure that they are not prevented from operating existing businesses or new opportunities that would not directly compete with the franchise. Thought needs to be given particularly where a franchisee operates multiple franchises or businesses that could be said to complete with the franchise.
Who bears risk and costs
When opening a franchise of an established business, the franchisee will need to comply with the franchisor’s standard operating procedures to protect the goodwill of the business. As part of this, it is likely that the franchisor will provide proprietary hardware and systems.
It should be clearly set out in the franchise agreement who is responsible for the cost of this provision, and who bears liability for any ongoing expenses such as equipment maintenance and replacement. The parties should also assess whether there should be a firm structure in place for training of staff, or whether a more ad hoc approach reflects reality and allows flexibility– this will often depend on the nature of the franchise business.. In any event, the franchisee should seek adequate protections that it will not be subject to unexpected fees throughout the term of the agreement for unnecessary training or retraining.
IP and license protection
Intellectual Property is the lifeblood of a franchisor – all franchise agreements are likely to have complex provisions designed to protect the skills, knowhow and techniques that are being licensed..
The franchisor will ensure that it has robust protections against the exploitation of its IP by the franchisee, whilst allowing their use in the proper course of business. The franchisee should ensure it has acceptable use of the IP and licenses as these will have a big impact on the success of the franchise.
Termination
Franchise agreements will set out certain circumstances under which either party can prematurely terminate the agreement. The franchisee should seek cure periods under which it has the right to remedy any breaches before the franchisor can terminate the agreement.
Correspondingly, the franchisor should ensure that it is protected against any significant or recurring breaches by the franchisee by holding the right to terminate.
Allied to this should be a right of first refusal or renewal to the franchisee at the end of the franchise period and where possible, key terms of that renewal should be identified in the existing agreement.
Conclusion
Franchise agreements are often documents that franchisor’s are not keen to see amended. Understanding the terms is therefore imperative. Notwithstanding, it is essential that balance is struck around protections of IP for the franchisor, and freedom to exploit that IP in a territory and for a term with enough flexibility that enables a franchisee to profit and also operate existing businesses or exploit other opportunities should it wish.
Clarkslegal LLP, has extensive expertise in advising on and completing franchise agreements both nationally and further afield.
If you need help or support, please contact our Corporate and Commercial team for more information.
