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The importance of a franchise agreement

By Carla Koutroulis, Consilium Legal Senior Associate. A comprehensive franchise agreement will be the cornerstone of success for both parties for any franchise in the retail sector.

By Carla Koutroulis, Consilium Legal Senior Associate. Franchises have become common place in the retail sector, and whether you are interested in opening a retail outlet that is part of a franchise (the franchisee); or whether you have a brand that you wish to expand and sell and open in different locations (the franchisor), a comprehensive franchise agreement will be the cornerstone of success for both parties.

Consumer Protection Act (CPA)
  • The CPA prescribes certain minimum requirements that must be included in any franchise agreement in order for that agreement to be valid.
  • An example is the requirement for the franchisor to deliver to the franchisee a disclosure document setting out a list of current franchisees and their contact details, outlets owned by the franchisor, an organogram of the support system in place for the franchisee, and an auditors certificate confirming the franchisor’s audited financial statements are in order.
  • The purpose of this disclosure document is to allow a potential franchisee to make an informed decision as to whether the potential franchise is financially viable.
  • The concept of a 10-day cooling off period contained in the CPA is also applicable to a franchisee. Therefore, should the franchisee elect to not proceed with the franchise within 10 working days after sign the franchise agreement, they are entitled to cancel the agreement, and any fees paid to the franchisor have to be returned to the franchisee. There are no fees that the franchisor may retain in this regard.
  • An important aspect for the franchisor to bear in mind is that during this cooling off period, the franchisor is not required to, and should not, disclose intellectual property such as training manuals and trade secrets (such as recipes etc), as the franchisee may elect to cancel in terms of the cooling-off period and terminate the agreement. Providing the franchisee with access to this information prior to the termination of the cooling off period, could expose the franchisee to intellectual property that will not be protected pursuant to a cancellation within the cooling off period, as a termination within the cooling off period will result in the agreement (and any confidentiality and restraint provisions) being null and void. It is also therefore important that you have a separate Non-Disclose Agreement in place when commencing any negotiations with a prospective franchisee to protect the any information shared during the negotiations and prior to the termination of the cooling off period.
Pertinent terms
  • The franchise agreement should at a minimum specifically set out each party’s rights and obligations, as well as carefully detail all fees and expenses that the franchisee may incur. This is required in terms of the CPA, but it will also prevent potential disputes at a later stage.
  • Fees that a franchisee would usually have to be liable for is a franchise fee to the franchisor, which is an upfront lump sum payment that essentially licenses the brand to the franchisee. Additional fees then include a fee towards marketing and advertising, as well as an ongoing fee to the franchisor, usually monthly or annually, that is commonly based on a percentage of the turnover of the franchise.
  • The agreement should detail the franchisee’s obligations with regards to the set up and layout of the premises, as well as the assistance that will be rendered by the franchisor in this regard.
  • The agreement should also detail what assistance the franchisor will provide to the franchisee in terms of training on products and systems, and how frequently any refresher training will take place.
  • An essential component of a franchise is that all products, aspects of the retail space, service, and overall customer experience, should be identical to all other franchises. Accordingly, it is important for the franchisor to include mechanisms to firstly check that these minimum standards are being complied with, and secondly steps that will be taken if the franchisee fails to implement these minimum standards.
  • The franchising parties may often agree on exclusivity within a certain region. This should be detailed in the franchise agreement, to stipulate whether or not the franchisor shall be entitled to sell additional franchises within a certain radius of that existing franchise.
Intellectual Property

1. Intellectual Property: As indicated above, intellectual property is a key aspect of a franchise relationship, and the main component of value.

2. Licensing IP: A franchisor, by virtue of the franchise agreement, is licensing its intellectual property to the franchisee in exchange for certain fees (such as the franchise fee). The agreement will then set out how the franchisee may, or may not, utilise the franchisor’s intellectual property.

3. The agreement: There are three types of intellectual property that need to be dealt with in a franchise agreement:

  • Trademarks – such as logos, slogans, graphics on packaging, etc.
  • Copyrights – this will apply to any literary, artistic or photographic work created on behalf of the franchisor, such as booklets, advertisements and marketing, menus, programmes, etc.
  • Know-how and trade secrets – this relates to the technical and commercial information of the brand. It is how the brand operates and is contained in things like manuals, recipes, and operating procedures. This type of intellectual property is proprietary and it is vital that this information remains protected, as it is often what adds significant value to a brand.

It is essential that the aspects surrounding the use of any intellectual property is properly dealt with in any franchise agreement. Franchise agreements are complex, and it is vital that contracting parties approach knowledgeable attorneys in obtaining assistance in the drafting and finalising of such agreements in order to ensure that both parties are appropriately protected and a successful business relationship is formed and nurtured.

 

Main image credit: Pixabay.com.

 

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