Drafting a Franchise Agreement – Tips and Traps
Are you thinking about franchising your business? If you are one of the first things you will need to do is prepare a franchise agreement. The Franchise agreement is the beginning of a relationship, and the franchise agreement need to account for this relationship and its ongoing changes. Australian Consumer law (ACL) applies to the franchise agreement. This is in place to prohibit misleading and deceptive conduct, unconscionable conduct and anti-competitive behavior. Below are some tips and traps to avoid when drafting a franchise agreement.
Term and renewal
As per the law, franchisees do not obtain right to a renewal of the term. However, if the option to renew is not a part of the agreement, it will greatly depreciate the attractiveness of your model. The expiry of term is a good time to make any changes to the agreement and also to end an unsuccessful relationship. Shorter terms allow for this flexibility to change the model, whereas longer terms provide stability and may be more attractive to franchisees.
Prices and payments
Any franchisee will need to pay money to the franchisor. This can be in the form of a setup fee, ongoing service fee or profit percentage. The franchise agreement needs to set these payments out clearly, as well as include a system to allow change. This needs to be included to allow the franchisee flexibility in these payments if circumstances change or if an extra budget is needed, for example a marketing budget.
Setting the territory in the agreement is hard, but essential. Problems can arise because the franchisee will undoubtedly want to have exclusive territory, with no chance of other franchisee’s entering that territory. But at the same time, future expansion has to be considered for the franchisor. ‘Carve outs’ allow for a little flexibility when it comes to offering non-competing products and services, a more flexible option is providing for change to the territory on a predetermined set of principles.
Getting the fundamentals right
If your franchise is successful, then the model set out in the agreement is definitely going to change. To allow for this, the franchise agreement needs to be set out accordingly from the start. To ensure that your agreement allows for flexibility to adapt to a changing business, make sure that you get the fundamentals right from the outset.