Franchise arrangements – paying the price for the brand

Corporate and Commercial / 25 April 2017

We are all familiar with those big brands boasting stores or restaurants across the country and the globe. Even though a Franchise Agreement will ensure all branches have identical or very similar standards and obligations, we sometimes find ourselves preferring one branch to another. So what is going on behind the scenes?

Franchise Agreements between a Franchisor and a Franchisee, entitling the Franchisee to sell the Franchisor’s products or services under its brand, can be cumbersome and complex. They are also notoriously drafted strongly in favour of the Franchisor to ensure that its most valuable assets are protected – its brand and its customer base.

It is not unusual for a Franchisee to face significant pressure from the Franchisor who wants to achieve maximum profitability and growth. Not only will it charge the Franchisee a fee, typically based on a percentage of the Franchisee’s revenue, but it might also impose minimum trading performance levels. Being bound by such onerous terms, liable for high fees and charges, and having a lack of control over the direction of the business might tempt a Franchisee to get out and ‘go it alone’.

However, the Franchise Agreement will contain various obligations on the Franchisee to act in good faith and in the best interests of the Franchisor. There will also be comprehensive restrictive covenants preventing the Franchisee (and its employees, and perhaps even relatives) from going into competition with the Franshisor or soliciting its customers for a defined period following the termination or expiry of the Franchise Agreement.

A Franchisee will have no, or very little, negotiating strength as to the terms of the Franchise Agreement. Franchisees must ensure that they are comfortable with the proposed terms. Exiting such an arrangement before the end of the term, typically three or five years, without being bound by significant obligations or incurring substantial financial liabilities might not be an option.

We have experience advising on and negotiating Franchise Agreements so please get in touch if you would like advice on yours.

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