One of the issues we discussed last edition was to be aware of the distinction between an option to extend into another franchise territory compared to a first right of refusal to do the same thing. Of course, if you have the option, that is ideal, as we discussed.
Whilst on the issue of options, whilst the franchisee may have an option to extend the franchise as long as it has not breached the terms of agreement, there may be a renewal fee payable to the franchisor for doing so.
Further, if the franchisee conducts business as a sole trader in a partnership, what happens if the franchisee should die? Many Franchise Agreements do not allow the franchisee’s estate or beneficiaries to continue the operation of the business. In some, the death will be an event that actually terminates the franchise.
In relation to termination issues, you need to be fully aware of all issues that could entitle either party to terminate the franchise, and if termination occurs, you need to know what the Agreement requires for the stock and equipment – in some cases the franchisor may buy them back or, however, it often will involve a buy back at a discounted rate or often there is no requirement to purchase all of the stock and equipment.
The franchisee may be required to also cover the cost of delivery back to the franchisor.
In any business, a major component when you are looking at selling is the goodwill that you have worked hard to develop. A lot of Franchise Agreements effectively gift the goodwill you have built up to the franchisor, or at least part of it.
On the topic of selling a franchise business, the Agreement needs to specific your entitlement to do so, although it will always require the franchisor to consent. An essential term will be that the consent should not be unreasonably withheld, and parameters for withholding consent should be made clear.
Again the issue of a first right of refusal arises in these circumstances, as many Franchise Agreements require you to offer the franchise to the franchisor in the first instance, and prevent you from selling to anyone on terms more favourable than you have offered to the franchisor.
Franchises often provide for a training program, however frequently they do not specify with any provision the nature of the training, how long it goes for and exactly what is involved.
It should also indicate very clearly who pays for the training in all circumstances, and should provide a means whereby the cost of the training can be determined if the franchisee is required to pay.
Once again, the recent Franchise Agreement I reviewed failed to specify the costs or how they were calculated, and the franchisor even refused to provide any detail of what it would charge currently. Naturally all alarm bells were ringing loudly.
It is very common for Franchise Agreements to require the franchisee to purchase everything it needs from the franchisor or a supplier nominated by the franchisor.
Rarely will the Agreement require the prices to be competitive, and frequently the franchisee will be required to purchase a minimum quantity regardless of what it has managed to sell.
Indeed, the Franchise Agreement may require the franchisee to sell a minimum quantity in a given period, and failure to do so will be a breach of the Agreement allowing the franchisor to exercise its muscle to the detriment of the franchisee.
The Agreement should detail who pays for promotion and advertising, and if it is the franchisee, it should be a transparent and appropriate process to determine how much is paid.
Other issues that the franchisee should control, but sometimes does not, are:-
- Engagement and termination of staff;
- Staff rates of pay;
- Client data base issues;
- Is there a right for the franchisee to engage in other business ventures that do not otherwise breach the Franchise Agreement?
The above is only really a brief summary of the multitude of issues for consideration, however they are perhaps some of the more important ones.
As I have indicated throughout, you need to retain the option of turning your heel and walking away from the proposal unless you are satisfied in all respects after a comprehensive review of the Franchise Agreement and the actual conduct of the franchisor.
Whilst a Franchise Disclosure document purports to make some of this information available to a prospective franchisee, the actual disclosure made may be quite misleading rather than informative.
As in all things, despite the paternalistic upsurge in consumer protection legislation, caveat emptor (let the buyer be aware).