When preparing a franchise agreement or franchise contract, issues can arise. How to make franchise agreements work for your particular business.
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Every franchise has a contract which sets out the obligations of the franchisor and franchisee. Issues arise when there are differences regarding the interpretation of those obligations and the implementation of the contract’s terms.
Common Franchise Contract Issues:
Franchise fees are paid by the franchisee to the franchisor for operational support and brand promotion. The same must be paid even if the franchisee feels they are experienced enough to operate without the franchisor’s assistance. If the fees are not paid it is a breach of the agreement which could lead to its termination.
Franchisees generally assume they are guaranteed an exclusive right to operate in a particular geographical area. However, this is not always the case and often leads to disputes.
Potential franchisees need to know whether they have an exclusive territory, and if that territory can be divided or taken away. It is important to discuss such detail prior to entering into the agreement and record any discussions in writing.
The contract will provide for any future relationship following its expiration. There may be an option to renew which may involve the same fees or reduced fees. To renew the agreement the franchisee may be required to sign a new agreement with different terms.
The contract may allow the Franchisor to change certain terms of the agreement without the franchisee’s consent. These changes could impose additional conditions which adversely affect the franchisee’s business.
Before you sign
Read the entire agreement and disclosure document carefully.
Talk to current and past franchisees regarding disputes that may have had with the franchisor and how the franchisor treated them. Contact details are in the disclosure document.
Obtain legal and accounting advice from experienced practitioners.
If something in the contract is confusing or silent seek clarification from the franchisor and confirm in writing.
Attempt to negotiate adverse terms of the agreement.
If a dispute arises with the franchisor, attempt to resolve as soon as possible using the internal dispute resolution procedure. If that does not resolve the dispute contact the Office of the Franchising Mediation Advisor who will appoint a mediator. If this fails you should seek legal advice.
DISCLAIMER: this newsletter is not intended as legal advice; no reliance is to be placed hereon.