Franchising is a popular way to expand a business and an increasing number of people are interested in taking on their own franchise. Whether you are an experienced franchisee or are new to the idea, there are a number of factors to think about before agreeing to take on the responsibility of having your own franchise.
Carry out due diligence
If you are considering potentially entering into a long-term commercial relationship with a franchisor, it is worth carrying out some due diligence beforehand. Try and get as much information as you reasonably can, to include how the brand and other franchises are performing generally.
Be cautious about termination and post termination restrictions
Franchisees should seek independent legal advice before attempting to terminate a franchise agreement with a franchisor. It may be, for example, that a franchise agreement allows the franchisor to terminate early if a franchisee is in breach of agreement, but the franchisee may not be able to do the same. The franchisee may have to stay in the business until expiry of the initial term of the agreement.
In most cases, franchise agreements will include post termination restrictions that limit what a franchisee can do for a certain period of time after leaving the franchise. If a franchisee terminates the agreement and breaches those restrictions, the franchisor may well decide to take enforcement action with costly consequences for the franchisee. The decision to terminate is not one to be taken lightly and getting this right will help to avoid disputes from arising.
Know what you will be paying for
A franchisee will usually be required to pay an initial fee and then make royalty payments to the franchisor on a regular basis. As well as this, franchisees can be asked to pay for other costs, such as training, equipment, or a sum of money on sale of the franchise itself. From a commercial perspective, it is therefore important for a franchisee to be aware of what is involved and what payments they will be responsible for. You should be satisfied that the opportunity meets your commercial expectations before you enter into it.
Get appropriate training
Most franchisors will have a handbook in place for a new franchisee to read, which aims to set out information about how to run the business. However, a franchisee that is new to business generally might benefit from having some additional training on topics such as corporate governance, HR or data protection. We can provide training services in these areas.
Understand the terms of the franchise agreement and your potential liability
It is important for franchisees to seek independent legal advice on the terms of a franchise agreement before signing, not only to ensure they fully understand the key provisions and obligations within that agreement, but also to make sure that everything that has been agreed with the franchisor is contained within the agreement.
In particular, franchise agreements often refer to a franchisee as an individual, which generally means they are personally liable to the franchisor. The franchisee can then be held personally liable for losses suffered by the franchisor, where the franchisee or the business is in breach of its obligations under the franchise agreement. It is important for a franchisee to seek independent legal advice on this point, to ensure they understand the full extent of their potential liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.