Before you sign
A franchise agreement gives you the right to run a business under someone else’s brand and system, in return for fees and a long list of obligations. It usually covers the initial fee and ongoing royalties, your territory, the operations manual you must follow, where you must buy supplies, marketing contributions, the length of the term and whether you can renew, when the franchisor can terminate, whether you can sell the business, and what you can’t do after you leave. Many franchisors also ask for a personal guarantee where the franchisee trades through a company.
The franchisor drafts it and wants every franchisee on broadly the same terms so the network stays consistent, which is why many will only negotiate at the edges. So you need to know exactly what you are signing up to before you pay anything. The points that most often cause trouble for franchisees are a territory that is less exclusive than it sounded, ongoing fees that add up to more than expected, a franchisor’s right to change the manual and require new spending, renewal that isn’t guaranteed, and post-termination restrictions that stop you carrying on in the same line of business.
The review reads the agreement from your side, as franchisee or franchisor, rates each clause, flags what’s missing and suggests wording to raise. The full report is £49 + VAT.
Why it’s worth checking
A franchise agreement is not a contract between equals. The franchisor uses the same document across its network and has usually signed many of them; you are signing one, often with your own money and a personal guarantee behind it. There is no franchise-specific legislation in England and Wales and no compulsory pre-contract disclosure regime of the kind some countries have, so the agreement, and the questions you ask before signing, are most of your protection. Some franchisors are members of the British Franchise Association and follow its code, which is worth asking about, but it is not a substitute for reading the contract.
Territory is the clause most often misunderstood. Imagine a franchisee who believes they have an exclusive town, and later finds the franchisor can supply customers there online, serve national accounts directly, or open in a shopping centre that the agreement’s map doesn’t quite include. Whether that is allowed depends entirely on the wording. Look at how the territory is defined, what exclusivity actually means in the clause, and what the franchisor has reserved to itself.
Money is the next thing to test. The initial fee is only the start. Add the fit-out, equipment, launch costs and working capital, then the ongoing royalties, marketing contributions, technology fees and any mark-up on supplies you must buy from the franchisor or its nominated suppliers. Ask whether the franchisor or anyone connected with it takes a margin or rebate on those supplies, and whether you can buy equivalent goods elsewhere. Then compare the total against realistic turnover for your area.
The manual matters more than it looks. Most agreements let the franchisor change the operations manual during the term, and the manual can require new equipment, refits or systems at your cost. A fair agreement puts some limit on this, for example by capping required refurbishment spending or tying it to renewal.
Then think about the end. Renewal is often conditional, and may mean signing the franchisor’s then-current agreement, possibly on different fees, rather than rolling over your existing terms. Selling usually needs the franchisor’s approval and may give it first refusal. And post-termination restrictions can stop you running a similar business in the area for a period after you leave. English courts will enforce these only if they are reasonable, but courts have been more willing to uphold them in franchising than in employment, because they protect the franchisor’s know-how and the rest of the network.
If you are the franchisor, the same clauses need to work for you: enforceable restrictions, a clear right to terminate for serious breach, and standards you can actually enforce, without terms so one-sided that they attract the wrong franchisees.
Key terms to look for
Franchise fees
The initial fee, ongoing royalties or management service fees (often a percentage of turnover), and any other charges. Add them up to see your total cost.
Territorial exclusivity
The area you operate in, whether it is genuinely exclusive, and whether the franchisor or other franchisees can sell into it online, through other channels or to national accounts.
Operating standards and brand compliance
The operations manual and brand standards you must follow, and whether the franchisor can change them during the term in ways that cost you money.
Supply chain and approved suppliers
Whether you must buy from the franchisor or nominated suppliers, whether the franchisor takes a margin or rebate, and whether you can source equivalent goods elsewhere.
Training and support obligations
What training and ongoing support the franchisor must provide, what is included in the fees, and what is charged extra.
Marketing fund contributions
How much you pay into the marketing fund, who decides how it is spent, and whether you get any reporting on it.
Term and renewal rights
How long the franchise lasts and whether you have a right to renew, on what conditions, and whether renewal means signing the franchisor’s then-current agreement.
Termination provisions
When the franchisor can terminate, whether you get notice and a chance to put breaches right, and whether you have any right to terminate.
Post-termination restrictions
Non-compete and non-solicitation clauses that apply after the franchise ends. They must be reasonable in scope, area and duration to be enforceable.
Transfer and assignment
Whether you can sell the business, the franchisor’s approval rights and any right of first refusal, and the fees charged on a sale.
Minimum performance targets
Any sales or performance targets, whether they are realistic for your area, and what happens if you miss them.
Insurance requirements
The insurance cover you must hold and maintain, and at what levels.
Disclosure requirements
The financial and operational information you must report to the franchisor, how often, and the franchisor’s right to inspect your records.
Common mistakes
Not calculating the total cost of the franchise
The initial fee is often a small part of the real cost once fit-out, equipment, launch marketing, training, working capital and the first months of ongoing fees are added. Franchisees who budget for the headline fee alone can find themselves short of money just as the business is getting going. Build a full cost and cash-flow forecast before you sign.
Not understanding territorial exclusivity
A territory described as a “primary area” or “area of responsibility” may not be exclusive at all, and even an exclusive territory may carve out online sales, national accounts or certain sites. Check exactly what the franchisor and other franchisees can and can’t do in your area.
Underestimating the obligation of ongoing royalties and fees
Royalties, marketing fund contributions, technology fees and supply mark-ups can together take a large share of turnover, and most are charged on turnover rather than profit. In a low-margin business that can wipe out the return. Add every recurring charge together and test it against realistic figures.
Signing without understanding performance targets
Minimum turnover or performance targets can give the franchisor a right to terminate or to shrink your territory if you miss them. Check whether the targets are realistic for your area, whether the franchisor can change them, and whether you get a chance to catch up before it can act.
Not reviewing post-termination restrictions
Non-compete and non-solicitation clauses can stop you running a similar business in or around your territory for a period after the franchise ends, and may also stop you dealing with former customers. They must be reasonable to be enforceable, but you shouldn’t sign on the assumption that a court will strike them down. Negotiate the scope, area and duration before you sign.
Best practice
If you are a franchisee, work out the full cost before you commit: set-up costs, working capital, every recurring fee, and any mark-up on supplies. Ask to speak to existing and former franchisees about how the numbers work in practice. Make sure the territory is clearly defined and find out what the franchisor has reserved to itself within it. Check that performance targets are realistic, that you have a right to renew and on what terms, and what the franchisor can require you to spend during the term. Read the post-termination restrictions and the transfer clause as if you were leaving tomorrow, because that is when they will matter. If you are giving a personal guarantee, understand how far it goes. Take independent advice on the agreement before you sign.
If you are a franchisor, keep the agreement firm on what protects the brand and the network (standards, confidentiality of the manual, reasonable restrictions after exit) and fair on the rest. Territory, renewal and exit terms that franchisees can understand reduce disputes. Post-termination restrictions that go further than your legitimate interests need are harder to enforce, so a narrower clause is often the stronger one.
Questions
Can I negotiate the terms of a franchise agreement?+
You can try, but expect limited movement. Franchisors want every franchisee on broadly the same terms, so many will refuse changes to the core agreement. Points that are more often negotiable include the territory boundaries, the start date for royalties or targets, the scope of a personal guarantee, and conditions for renewal or sale. Where the franchisor won’t change the main agreement, it may agree a side letter. Pick the points that matter most to you and raise them before you sign.
What happens if I do not meet the performance targets in the franchise agreement?+
It depends on the wording. Some agreements let the franchisor terminate if you miss targets; others allow it to reduce your territory, remove exclusivity, or act only after persistent failure or a period to improve. Check what the targets are, whether the franchisor can change them, and what happens if you miss them. If they look unrealistic for your area, raise it before signing.
Can the franchisor change the operating standards during the term?+
Most franchise agreements allow the franchisor to update the operations manual during the term, and you agree to follow it as changed. That can mean new equipment, systems or refurbishment at your cost. Check how wide the power is, whether there is any limit on what you can be required to spend, and whether major changes are tied to renewal. Where you can, ask for a cap on required spending.
What does a non-compete clause in a franchise agreement prevent me from doing after I exit?+
Typically it stops you running or working in a competing business within your former territory, sometimes a wider area, for a set period after the franchise ends, and often also stops you dealing with former customers. English courts enforce these restrictions only where they are reasonable to protect the franchisor’s legitimate interests, such as its know-how and the network, but they are more willing to do so for franchises than for employees. Check exactly what activities, area and period are covered, and negotiate them before signing rather than relying on a court to cut them down later.
Do I have the right to sell my franchise to someone else?+
Usually only with the franchisor’s consent. Most agreements let the franchisor approve the buyer, require the buyer to sign the then-current agreement and complete training, and charge a transfer fee. Some also give the franchisor a right of first refusal to buy the business on the same terms. Check whether consent can be unreasonably withheld, what the conditions are, and what fees apply, especially if you might want to sell within a few years.