What to consider in the franchise arrangement

The purpose of the franchise agreement is to clearly set out the rights and responsibilities of the parties for the duration of the business relationship. This can be a difficult task, as circumstances may change and a wide range of factors could intervene. Although each franchise agreement will vary depending on the nature of the franchise, the following is an outline of some of the key issues that need to be addressed in a franchise agreement::

· The parties to the contract need to be correctly identified, and include all relevant parties such as guarantors. If the franchisee is a corporation, personal guarantees are appropriate to ensure the payment of monies and performance of obligations. It would also be prudent for the franchisor to seek a non-competition covenant from the principals of the corporation in their personal capacity.

· The nature and extent of the franchise grant needs to be carefully specified and must establish what is given, for how long, on what conditions and with what reservations. Key issues to be dealt with include the duration of the franchise, whether there is any form of exclusivity, territorial obligations and what rights are reserved by the franchisor. A franchisor will generally prefer to retain maximum flexibility to respond to market conditions. If some form of exclusivity is given, it is common for there to be reservations for direct supply of some customers, and performance criteria to retain exclusivity. A first option for the franchisee is to take on an adjoining franchise is sometimes included.

· The rights and responsibilities of the parties in relation to the location and outfitting of the business need to be specified. As the franchise agreement is generally for an extended period, it is important to secure appropriate long-term tenure of premises from which the business is to be conducted. The franchisor must decide if it wants to take the head lease of the premises or exercise some direct controls over the location or other assets such as equipment, telephone numbers and internet sites.

· Payment obligations should be clearly described, with particular attention to the manner of payment; the frequency of payment; clarity of definition as to whether payments relate to either gross or net revenue and whether interest is required on late payments.

The agreement should specify the consequences of non-payment.

There is more information available in regards to Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.