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Franchise agreements are not as one-sided as they may appear to be.

Updated: May 16, 2023


franchise agreements

To the uninitiated, franchise agreements may appear to be heavily weighted in favour of the franchisor. They contain a large number of clearly defined actions that the franchisee must carry out while the running of the business. There are restrictions on exactly where they will

trade and after the agreement has terminated how long they are prevented from trading in the same type of business.


There are reporting requirements and conditions on the forms of advertising can be used. There are restrictions on how the franchisee can sell their branch and in many cases the agreement will state a percentage of the sale price must be paid to the franchisor. The franchisor, on the other hand, appears to have very few responsibilities or restrictions. They can even assign or sell the agreement without any reference to the franchisee.


Regrettably, this apparent imbalance of power has been known to encourage inexperienced or arrogant franchisors to adopt a dictatorial and domineering attitude to intimidate their

franchisees. But it doesn’t have to be this way because, in reality, a franchisee has a

considerable amount of power in the relationship. Franchisors can be held accountable for

their actions and for the way in which they control the business. As many have found.


franchisor and franchisee agreement

Franchisors must be very careful to ensure that the methods used to recruit new franchisees is not exaggerated or misleading. Advertising and promotional materials must be accurate and truthful. Financial projections must be suitable for the territory that is being contemplated

and any recent changes should be disclosed. This is especially the case in these uncertain times as the economy emerges from lockdown, How much reliance has been placed on pre- pandemic performance data? This obviously doesn’t apply to all businesses, but it certainly does to many. How much disruption will ‘working from home’ cause to franchised catering and retail outlets that rely on sales to office workers? A franchisor who has continued to recruit without recently revalidating their business model will be skating on very thin ice.

 
If you would like to discuss your franchise agreement then please get in touch with us by emailing enquiry@franchiseproblemsolutions.co.uk
Franchisee success rates
What is the success rate of previous franchisees?

Of critical importance is the performance of the existing franchisees. How many have failed

or are in the process of failing? In the US, the home of modern business format franchising,

laws exist that require franchisors to provide prospective franchisees with a list of all, yes all,

the franchisee failures. No such protection exists in the UK and some franchisors go out of

their way to conceal this statistic. Some franchises with high failure rates have even used non-disclosure agreements to silence franchisees who have failed. A franchisor who, when recruiting, has used distorted or inaccurate information about how many successful franchisees it has runs a risk of a claim for misrepresentation.

Franchise agreement paperwork

Many franchise agreements state that the franchisee must make a regular contribution to advertising in addition to the royalty or service fee for operating the franchise. The franchisor is usually required to keep this money in a separate bank account and send a statement to the franchisees to show them how it has been spent. Some franchisors don’t bother to do this which could lead to a claim for misappropriating the funds. Another area within the scope of advertising is if an advertising fund is used by the franchisor to engage the services

of a digital marketing company. This would typically involve localising the advertising on

Google and Facebook. There have been many cases where mistakes have been made and

incorrect local numbers or post codes have caused errors that have deprived franchisees of

sales enquiries. Again, the responsibility lies with the franchisor.


Considering a franchise agreement

Franchisees are required by the franchise agreement to use the methods described in the

operations manual. But it obviously follows that the franchisor has a responsibility to make sure that the manual is up to date and still relevant to the business. Amazingly, there have always been examples of franchisors who have gone for long periods, sometimes years, without making updates. Everyone knows that businesses must continually adapt to new technology, changing circumstances, competitor activity and the fickleness of customer demand. An effective and competent franchisor will be continually monitoring this and making regular changes to the business model. This requires promulgating to the franchisees through the ops manual and in some cases through re-training. A franchisor who isn’t continually supporting its network of franchisees by doing this can, and should, be held accountable.


These are just some of the many areas for which the franchisor is responsible but which are

not specifically defined in the franchise agreement. The balance of power in a franchise is

clearly not as one sided as it may appear.

 

If you would like to discuss your franchise agreement then please get in touch with us by emailing enquiry@franchiseproblemsolutions.co.uk

 

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