The importance of franchise agreements

Perhaps no other single part of the franchise development process is as important to the ultimate success of the franchise system as is the franchise agreement.

This is because a lousily-prepared franchise agreement exposes the franchise system to misuse, leading to loss of control and eventual collapse of the franchise system.

The agreement should therefore explicitly describe the entire extent of the franchisor’s relationship with the franchisees, leaving nothing to guesswork.

It should also outline the terms and considerations by which the franchisor will agree to allow franchisees to use the franchisor’s intellectual property and to sell the franchise products or services.

Finally, it should strictly ensure uniformity of standards of operation throughout the franchise system as different standards degrade the franchise system.

The franchise agreement should include and balance the interest and needs of both the franchisor and franchisee.

If the agreement favors only one party, it serves no purpose as a discontented franchisee will not be motivated to serve the aims of the franchisor, will not talk positively about the franchisor nor will (s)he promote, together with other franchisees, the image and trademark of the franchisor. They will also not contribute to the success of the total network.

Henry Ford once told the U. S. Senate that a franchise relationship was like a marriage. This view was later alluded to by Greg Nathan-an Australian corporate psychologist who has been both a franchisor and a franchisee-by tracing the franchisor-franchisee relationship along the lines of a marriage relationship.

He identified three stages through which the franchise relationship matures, from dependence, independence to interdependence. In franchise circles, this is referred to as the “franchise e-factor”.

A more accurate analogy today of franchising which is easily reflected in the dependence stage of the franchise e-factor is that of a virgin bride (franchisee) and an experienced groom (franchisor).

At the dependence stage, the franchisee (like the virgin bride) relies on the franchisor for guidance and support and is keen to learn the franchisor’s business systems in order to realize own goals.

Everyone is highly optimistic about future prospects. Marriage is a form of relational contact and the analogy is useful in understanding not only the franchise relationship but also the degree to which legal constraints can limit opportunism in the relationship. The analogy also suggests why non-legal constraints cannot sufficiently regulate the franchise relationship.

In 2004 Prof. Andrew Terry (of the School of Business Law and Taxation, University of New South Wales, Sydney-Australia and a practicing franchise lawyer) presented a paper at the 18th Annual International Society of Franchising conference in Las Vegas, USA stating “There is increasing recognition, academic and judicial, that traditional classical contract law which grants primacy to the written agreement is inappropriate in case of ongoing, interdependent and co-operative relationships such as business format franchising, which exists in a world of contractual incompleteness and relational complexity”.

He further reasoned that in contracts of a “relational” nature obligations arise not only from the written contract but also from the norms of the ongoing relationship which supplement the express contractual obligations.

He stated that the contract parties are not strangers and that “much of their interaction takes place “off contract”, mediated not by visible terms enforceable by court, but by a particular balance of co-operation and coercion, communication and strategy”.

In his view contract law worldwide has not been sympathetic to the proposition that in relation to agreements of an ongoing, interdependent, co-operative nature the parties should be accorded reasonable security for the protection of justified expectations”.

The writer is the Project Promoter and Lead Franchise Consultant at Africa Franchising Accelerator Project aimed at achieving faster African economic integration under AfCFTA.

We work with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise.

We turn around struggling indigenous franchise brands to franchise cross-border. We settle international franchise brands into Africa to build a well-balanced franchise sector. We create a franchise-friendly business environment with African governments for quicker African economic integration.

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