Issues to consider in the franchise arrangement
by
Norton Rose
The parties to the contract need to be correctly identified, and include all relevant parties such as guarantors. If the franchise is a corporation, personal guarantees are appropriate to ensure the payment of moneys 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 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 other 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 (e.g.. by direct debit);
- 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 also specify the consequences of non-payment.
Any performance criteria need to be described, with any consequences (such as loss of exclusivity, additional training or termination) clearly described.
The supply arrangements need to be specified, with any specific trading terms included in the agreement or by reference. Some important matters relating to stock that may need to be addressed in the agreement include:
- the minimum amount and range of inventory by the franchisee;
- any pricing requirements, subject to the Trade Practices Act restrictions;
- the manner of display of such items;
- the terms of payment for stock
- dealing with external suppliers; - the responsibility for freight and insurance; and, if applicable,
- any support services required to be provided by the franchisee.
The franchisor’s obligations should be specified in a manner that provides security to franchisees, but does not expose the franchisor to liability unnecessarily.
The franchisee’s obligations need to be described in detail to ensure that the franchisor can enforce compliance with the system for the benefit of all. The franchise agreement will set out the key obligations, and then generally contain an obligation for the franchisee to comply with the systems and procedures described in the operations manual. The franchisor normally has the power to amend the operations manual from time to time.
Important issues such as audit and inspection, reporting, insurance, confidentiality and assignment should be addressed.
The grounds for termination of the franchise agreement must be clearly described, and must comply with the Franchising Code of Conduct.
The agreement should provide, in detail, for the consequences of termination. For example, the franchisee may be required to vacate the premises, return copies of the operations manual, assign telephone numbers and directory listings to the franchisor, and refrain from any involvement in a competitive business. Any franchisor obligations to repurchase stock, and any options to purchase the business or any assets, should also be included.
See the running and franchise and buying a franchise pages for additional information.
This article was created by Deacons and appears courtesy of Austrade . 27.06.2007
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