A franchise contract is the backbone of any franchising relationship, defining the terms, rights, and obligations of both the franchisor and the franchisee. For aspiring franchisees, understanding this document is essential to ensure a mutually beneficial partnership and to safeguard your investment.
Franchise agreements can be daunting, often stretching to 40–50 pages and packed with legal jargon. Yet, taking the time to understand them is critical for avoiding pitfalls and ensuring long-term success. As John H. Pratt, a leading franchise law expert, current partner at Hamilton Pratt, and former legal advisor to the British Franchise Association (BFA), notes:
“Having a solicitor who is knowledgeable about franchising review the agreement and point out those provisions which are unfair or unusual or unworkable is essential—it is a bit like obtaining a survey on a house/flat that you are buying.”
To shed light on these contracts, John H. Pratt’s insights and The Franchisor’s Handbook offer practical guidance on navigating the most important clauses. Here’s what prospective franchisees need to know before signing on the dotted line.
Payment clauses: Understanding your financial commitments
Franchise agreements typically detail three key payment obligations:
• Initial Fee: A one-time payment for acquiring the franchise. John H. Pratt advises ensuring this fee is not a profit center for the franchisor, as that’s considered poor practice.
• Continuing Fee: A percentage of turnover, averaging around 9%, used to fund ongoing support and development.
• Marketing Levy: Typically, 2.5%, allocated to promoting the brand at a national or regional level.
“The franchise agreement should not contain any right of the franchisor unilaterally to increase the fees, other than to cover inflation or to charge a large number of other fees,” John H. Pratt cautions. Clear financial terms are fundamental for transparency and sustainability.
Exclusivity clauses: Securing your territory
Exclusivity clauses determine whether a franchisee has sole operational rights within a specified area.“By no means all franchises grant exclusive territories and, indeed, there may be good reasons why a franchisor would not want to grant exclusivity,” John H. Pratt notes. While this may be a strategic decision to grow the brand, prospective franchisees must evaluate how non-exclusive terms could impact local competition and profitability. For instance, sharing a territory with another franchisee may dilute customer bases, requiring a more aggressive marketing approach to maintain revenue.
Understanding these clauses ensures that franchisees can assess the competitive landscape and make informed decisions about location and market viability.
Duration and renewal: Safeguarding longevity
The typical duration of a franchise agreement in the UK is five years. This period should be sufficient for franchisees to recover their investments and generate profit. “Further, there should be two automatic rights of renewal unless there have been serious breaches or poor performance by the franchisee,” John H. Pratt explains. Renewal clauses should avoid unreasonable barriers, such as arbitrary performance metrics, which might disrupt future operations.
Simplification and plain English: A growing trend
Historically, franchise agreements have been lengthy and complex. However, recent trends prioritize plain English, making contracts more accessible. “Until recently lawyers have produced ever more complex franchise agreements, but judges have criticized this, leading to a trend towards simplicity,” John H. Pratt adds. Clear agreements reduce misunderstandings and foster trust.
The Franchisor’s Handbook underscores the importance of straightforward contracts, as convoluted terms can deter franchisees and lead to disputes.
Legal advice: An essential investment
No franchisee should sign a contract without seeking expert legal advice. A specialist franchise solicitor can identify clauses that may be unfair, unworkable, or unnecessarily restrictive.“…Having a solicitor who is knowledgeable about franchising review the agreement and point out those provisions which are unfair or unusual or unworkable is essential – it is a bit like obtaining a survey on a house/flat that you are buying,” John H. Pratt says. “Franchise agreements are detailed and long-term, making legal scrutiny essential.”
Using solicitors affiliated with the BFA is particularly beneficial, as they are well-versed in franchise law and industry standards. Their expertise can prevent costly disputes down the line and ensure the agreement reflects current best practices.
Conducting due diligence: Insights beyond the contract
While the contract is pivotal, speaking with existing franchisees offers invaluable real-world insights. “You must obtain a full list of all the franchisor’s franchisees,” John H. Pratt advises. “You need to speak to them and ask them as many searching questions as possible. Obviously, those questions will include how much money they are making and is the franchisor supportive.”
Additionally, understanding a franchisor’s reputation and operational practices is key. Transparent franchisors will often share their business performance data and outline their strategies for franchisee success.
Building a strong foundation
Understanding a franchise agreement is more than a legal exercise—it’s a vital step toward establishing a sustainable and successful business relationship. From payment structures and exclusivity to due diligence and legal advice, every clause plays a pivotal role in protecting both the franchisor and the franchisee.
As John H. Pratt emphasizes : “A well-structured franchise agreement is not just a contract—it’s a partnership blueprint. Taking the time to understand it fully is the first step toward a thriving franchise journey.”
For aspiring franchisees, investing in expert advice and conducting thorough due diligence isn’t just a recommendation—it’s essential. Consulting resources like the BFA and engaging specialist solicitors can empower franchisees to navigate the complexities of the agreement with confidence. With the right preparation, a franchise agreement can become the foundation for a rewarding and prosperous venture.
