Should my Franchise Agreement be reviewed?

A Franchise Agreement is a Commercial Contract

Those wading into franchising for the first time can be forgiven for believing the law offers some form of protection should they make a wrong decision. While it can be tempting to assume that Consumer Protection legislation may offer a shield against unscrupulous franchisors, this is not the case.

Franchise agreements are by their nature commercial documents. In light of this commerciality, and despite the inequality of bargaining power between the parties, this means that the terms of a franchise agreement are binding. Should a franchisee not fully appreciate the provisions before signing, there are typically no immediate rights permitting termination of the agreement.

There is of course the option to enter into a legal dispute with the franchisor on the basis that the business may have been mis-sold or misrepresented. However, this avenue is likely to incur significant legal fees, and achieving termination without the payment of damages to the franchisor is not guaranteed.

Due Diligence of the Franchise Agreement is Important

Most, if not all, prospective franchisees appreciate that carrying out as much research as possible into the franchisor and wider franchise network is critical. Unfortunately, this approach to risk does not always stretch to encompass the necessary legal documentation required to formalise the arrangement.

With the above in mind, it is especially important to ensure due diligence extends to a review of the franchise agreement when the inclusion of special terms has been agreed. It is not uncommon for a franchisee to believe that carefully negotiated advantages have been included, only to sign the agreement and later realise that these have been omitted entirely.

Whilst a franchisor might state that their agreement is non-negotiable, it is not uncommon for an addendum of changes to be agreed alongside the standard form franchise agreement, departing from or clarifying some of its terms.

There may be Hidden Obligations and Costly Provisions

In the initial stages prospective franchisees will receive a wealth of marketing material from the franchisor setting out typical obligations and projected earnings. However, material of this nature is always qualified to state the information is indicative only and the franchisor is not liable for any statements contained therein.

As can be expected, the information contained in such commercial advertising therefore does not always accurately reflect the obligations contained in the agreement itself. Many a franchisee has signed a franchise agreement in reliance on such material, only to later be liable for higher than anticipated fees and/or additional hidden expenses. For example, often the franchisor is able to require the franchisee to destroy and republish its marketing materials or amend its processes, to fall in line with changes to the franchisor’s brand and system requirements – this can be costly if frequently exercised and a franchisee might seek an addendum ensuring that changes of a greater than acceptable frequency are met by the franchisor.

Having your franchise agreement reviewed by a legal professional will allow you to execute the document with any addendums you need to give you peace of mind, and an informed understanding of your obligations and risks.