Documents in franchise system development

Monday September 2 2019



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

Past articles have dwelt on the major documents necessary when developing the franchise system before a franchisor can attract franchisees.

The Franchise Package, primarily the Franchise Disclosure Document and the Franchise Agreement is a minimum necessity for franchisors wishing to play by international best practice in franchising. In order to protect the Franchise Package, a Non-Disclosure Agreement is signed prior.

We now turn to other equally important documents that are mostly ignored by most franchisors. Some may easily be included in the franchise agreement but others are better when they stand on their own. The first category includes Software License Agreement that franchisees get from franchisor to use the latter’s software in running their franchised outlet.

This is particularly the case where the franchisor has developed a customized software, which would only be availed to the franchisee during tenancy of the franchise and whose structure must be kept confidential by the franchisee after disengagement with franchisor.

Secondly, if the franchisor wishes to take the risks associated with helping the franchisee with staffing issues, one of such areas will be Employment Contracts. This is however, highly discouraged. The franchisee is best left to handle by themselves, or at best, the franchisor recommends a professional employment agency to handle for all franchisees.

The second category includes the following. First the IP Rights Assignment Deed. Where a separate company is formed to own and drive the franchise network roll-out as is normally the preferred option, it requires a legal basis on which to recruit franchisees. This is done through the first company assigning to the second the first’s IP rights, which the second uses as though they belonged to the second. This process is covered under an assignment deed.

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Second is Franchise Deposit Agreement. Although it is a requirement that no monies are paid to the franchisor before potential franchisees sign the franchise agreement, it is also a reality that potential franchisees sometimes drop off negotiations even after the franchisor has spent considerable time and effort, including ceasing negotiations for the specific territory with other prospects who would have moved on.

Putting down a deposit protects the subject territory for both parties in that both are more likely to be serious about the deal.

A Franchise Deposit Agreement acknowledges receipt of such deposit and stipulates its conditions-such as whether it is fully refundable or the franchisor can deduct any expenses incurred reasonably and what such expenses are.

Third are Site Lease Agreements. In order to protect their interests in franchised territories, franchisors normally require franchisees to operate from leased rather than franchisee-owned premises. This forestalls franchisees refusing to vacate the sites in case of future fall outs.

For the franchisor (or their approved new franchisee) to easily takeover running of the franchise in case of future fall outs with current franchisees, franchisors prepare standard lease agreements to be used on all sites. They include what is called a “Lease Option”-stipulating that the landlord must, should the franchisor present a notice of termination of the franchisee, assign the lease to the franchisor or the new franchisee.

Forth are Telephone Transfer Agreements. Where orders are taken through the telephone- which is owned by the franchisee, the franchisor or new franchisee taking over after a fall out with current franchisee would lose all such orders.

A telephone transfer agreement is signed by the parties beforehand and presentedto the telephone company to transfer the line to the franchisor or new franchisee in fallout circumstances.

Last are Suretyships/Guarantees tying the shareholders of the franchisee company to the liabilities of the company. This breeds more commitment by the franchisee and allows franchisors to recover any losses, if any, directly from the shareholders in the event the corporate is unable to meet its obligations.

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.

wambugu.wagichohi@worldaheadafrica.com, franchising@tpsftz.org

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