Important clauses in a franchise agreement
Modern franchise agreements are comprehensive legal documents of not less than fifty pages, which franchisees are advised to seek legal interpretation before signing.
We continue with items covered in a franchise agreement. Sixth, payments. This clause will normally specify the initial payment and its components, the ongoing payments (management service fee/royalties, marketing fees and training fees where additional training is required) and the method of calculation thereof. This may be a fixed sum, turnover or margin-based.
Seventh, the relationship between the franchisor and franchisee. To protect the franchisor, the reality of a franchise arrangement needs to be recognized-the franchisee is a business independent of the franchisor, only granted certain rights to operate under the intellectual property of the franchisor.
It is therefore advisable to make provision for a visible notice at the premises, clearly indicating the franchisee’s independent proprietorship of the franchised business.
Eighth, use of intellectual property rights. A vital component of the rights granted is the right of access to and use of the franchisor’s intellectual property e. g trademarks, trade secrets, trade names, copyright etc. It is important for the franchisor to ensure proper protection of these prior to franchising.
These rights are normally the most visible features of any franchise and are generally the main force behind the attraction of custom.
The agreement should ensure that the franchised system is not exposed to misuse by third parties; it is respected by franchisees and is exclusively available for the collective benefit of all involved in the franchised system.
Ninth, improvements to intellectual property. Franchisees may want, from time to time, to make improvements to the business system and intellectual property.
Provision should be made for disclosure and agreement through the Franchisee Council prior to such improvements and transfer thereof to the franchisor to ensure availability to the whole operation.
Mishandling this will result in a mutilated franchise system with as many variations as the number of innovative franchisees therein.
Tenth, assignment (transfer) of rights. Rights granted are normally personal to the franchisee, transfer-ability of which must essentially be limited because in the first place, they belong to the franchisor.
Notwithstanding the franchisee’s equity in the franchised business, the franchisee should not be allowed to dispose of the franchise without prior content of and approval of the transferee by the franchisor.
The agreement should preferably contain guidelines in terms of which the franchisor will be prepared to grant such consent and approval.
Eleventh, death or incapacity of the franchisee. The agreement may provide for the transfer of the franchised business to any of the beneficiaries of a deceased or incapacitated franchisee or for the sale of such interest.
It should provide for interim arrangements and will normally contain reservations in favor of the franchisor to exercise or participate in the control of the business and to charge training or other fees where necessary.
Twelfth, restraint of trade. During the franchise term, franchisees access the franchisor’s business secrets, which they use to make a return on their investment.
It is customary for the franchisor to impose a restraint of trade clause effective beyond termination of the agreement, to protect the legitimate interest of the franchisor and other franchisees. For example, the franchisor might impose that the franchisee will not be allowed to open a similar business within a certain radius of his/her franchised outlet for a period equal to or double the franchise term.
For the restraint clause to hold during litigation, it must be reasonable and only aimed to protect the legitimate interest of the franchise system.
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.
