The Franchise agreement basics
What you need to know:
- Franchisees, however, are generally gullible, taking things for granted, making decisions too hastily and are easily excited at the initial stage of staring up a franchise.
- A franchise agreement must therefore balance the franchisor’s need to control the franchise with the value of their intellectual property with the franchisees’ inherent need to manage their businesses and protect their investment.
- It is not the document on which to save money by copying a “standard” franchise agreement or for “boilerplate” legal work.
We have been on an exploratory journey of key documents needed to protect your franchise system.
We have discussed the Franchise Disclosure Document (FDD) and the Franchise Operations Procedures and Training Manual in detail and we now turn to the Franchise Agreement. The three form what is commonly referred to as the “Franchise Package”.
The franchise agreement is the most misused document in franchising in that many franchisors in unregulated markets rely on it solely to offer ‘franchises’ to franchisees. When approached this way, the franchisee is short-changed as it could well turn out to be fraudulent.
To deliver a franchise system professionally and protect it against abuse, all three documents in the franchise package need to be expertly prepared. So next time you are offered a franchise without the complete franchise package, ask the person to disappear.
Franchising is a working partnership between the franchisor and multiple independent franchisee businesses.
Franchisees however, are generally gullible, taking things for granted, making decisions too hastily and are easily excited at the initial stages of starting a franchise.
These attitudes often lead to them investing in a franchise without first investigating and conducting proper research.
The franchise package provides upfront information to the franchisee before committing to acquiring a franchise.
It also guides the day-to-day operations to ensure uniformity of the franchisor’s standards. Finally, it describes the entire extent of the franchisor’s relationship with the franchisee.
It is the last part of the franchise package that a franchise agreement addresses. A franchise operates within a sphere of constrained independence.
A franchise agreement must therefore balance the franchisor’s need to control the franchise with the value of their intellectual property with the franchisees’ inherent need to manage their businesses and protect their investment.
When properly constructed, the franchise agreement takes into consideration the interests of both the franchisor and franchisee and it must be a fair and reasonable legal arrangement to create a win-win situation for both parties.
A franchise agreement is generally viewed as an ordinary commercial contract governed by the same legal principles as any other contract.
It is a framework for the smooth operation of the franchisor-franchisee relationship.
While the agreement specifies major operational and financial issues, it often refers to the operations and procedures manual to provide the necessary details.
The franchise agreement also allows the franchisor to legally enforce specified operational, performance and reporting objectives detailed in the operations and procedures manual.
I often receive requests by business owners to give them a franchise agreement template localized for African businesses after realizing the internet-downloadable templates are too far-off the African context for them to use in selling franchises.
I always decline politely the temptation to earn from such for obvious reasons.
The franchise agreement needs to be watertight as well as being an attractive proposition.
But these two conditions often conflict. On one hand the franchisee needs room to operate in rather than being constrained by irrelevant red tape. The franchisor, on the other hand, needs an effective means to control the business without having it exposed to unwarranted risks.
The only way to reconcile these two conflicting conditions is for each franchise agreement to be as unique as the business it represents. This is the only way the document becomes effective in protecting the franchise system.
It is not the document on which to save money by copying a “standard” franchise agreement or for “boilerplate” legal work. It needs to be prepared specifically for the franchise operation, having already prepared the other documents of the franchise package.
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.
