Franchise agreements: a franchisee’s checklist before you sign

A franchise agreement is usually long, written by the franchisor and offered on a take-it-or-leave-it basis, at least at first. Unlike some other countries, the UK has no franchise-specific legislation. There is no statutory duty on a franchisor to give you disclosure documents, no cooling-off period and no regulator approving the terms. The British Franchise Association (BFA) is a voluntary membership body whose members agree to follow its code of ethics, but many franchisors aren’t members and the code isn’t law. So the written agreement, and the checks you do yourself, are most of your protection.

Before the agreement: your own due diligence

Speak to existing franchisees, and to former ones if you can find them. Look up the franchisor’s filed accounts at Companies House. If you have been shown earnings figures or projections, ask how they were worked out and whether they are based on real outlets. Then check the agreement itself, because most franchise agreements contain an entire agreement clause, and often a clause saying you haven’t relied on anything said before signing. Those clauses are designed to limit claims based on what you were told in the sales process, so anything important should be in writing in the contract.

1. Fees

List every payment: the initial fee, the ongoing management service fee or royalty, any marketing contribution, and charges for training, technology, renewal and transfer. For each, check how it is calculated (a percentage of turnover is charged whether or not you make a profit), when it is paid, and whether the franchisor can increase it. Our guide to franchise fees goes through each of these in more detail.

2. Term and renewal

Check how long the agreement lasts and what happens at the end. A right to renew is only as good as its conditions. Renewal often depends on having complied with the agreement throughout, refurbishing the premises at your cost and signing the franchisor’s then-current form of agreement, which may have higher fees or a smaller territory. If renewal is at the franchisor’s discretion, you could build the business for years and then have to walk away from it, possibly bound by a non-compete.

3. Territory

Find out whether you get an exclusive territory, how it is defined, and what the franchisor keeps for itself. Many agreements reserve online sales, national or key accounts and sales through other channels to the franchisor, even within your area. Check whether you can lose the territory, or have it reduced, if you miss performance targets.

4. Obligations and the operations manual

The agreement will usually require you to follow the franchisor’s operations manual, and that manual can often be changed by the franchisor at any time. Ask to see it before you sign and check whether changes that cost you money, such as new equipment or a refit, are limited in any way. Look at where you must buy supplies, reporting requirements, minimum opening hours, insurance and staff training. On pricing, competition law generally prevents a franchisor from fixing your minimum selling prices, although it can recommend prices or set a maximum.

5. Termination

Check the grounds on which the franchisor can end the agreement and whether you get a chance to put a breach right first. Look out for broad grounds such as damaging the brand, and for cross-default clauses that let the franchisor terminate all your units for a problem at one. Also check whether you have any right to terminate and what happens after termination, including handing back customer data, removing branding, and what becomes of your premises lease.

6. Selling the business and personal guarantees

Your exit is often your main return, so check whether you can sell the franchise, what consent you need, whether the franchisor has a right of first refusal and what transfer fee applies. If you trade through a company, the franchisor will often ask you to guarantee the company’s obligations personally, which means your own assets are at risk if the business fails.

7. Restrictions after the agreement ends

Most franchise agreements stop you running a competing business for a period after they end, and restrict you from approaching customers or using the franchisor’s know-how. How far these can go is governed by the restraint of trade doctrine and competition law, and our guide to non-compete clauses in franchising covers both. Check the length, the area and how “competing business” is defined, and whether the restriction applies however the agreement ends.

Negotiating

Franchisors want a uniform network, so the core terms often don’t move. Points specific to you, such as the territory, the opening timetable, performance targets and the terms of any personal guarantee, are more often open to discussion. For a significant investment, it is worth having the agreement looked at by a solicitor who knows franchising before you commit.

See a sample report to see how QuickLegalCheck sets out the risks in a contract and the points to raise before you sign.