Franchise Agreement I

Key Commercial Issues

The franchise agreement is largely a matter of contract law. The core of the agreement is the grant to the franchisee of an exclusive or non-exclusive license to operate the franchise business, together with  ancillary intellectual property rights, know-how, and assistance. There may be a separate trademark license.

The franchisor may agree to give the franchisee exclusivity within the territory or not.  Generally, an initial fee is payable. The terms of the initial fee are subject to negotiation. It may be substantial in some cases.

The term/ period of the agreement will be specified. They may be an option or right to extend or renew the franchise at the end of the term.   Otherwise, a renewal must be agreed. Conditions may apply to renewal such as undertaking refresher courses or paying further fees and cost.

Terms of between 5 to 10 years are common.  The first agreements in a new territory may have a much longer duration, perhaps for up to 25 years. In some states, there are restrictions on the maximum term. There may be provision for renewal of the term. There may be a provision for an automatic renewal or for a negotiated renewal.

Territory

The grant of the franchise will define the area, period, and nature of the rights granted. The territory will be defined. It may be a political, geographical, or regional area. The agreement may contemplate the franchisee taking on additional adjoining areas. For example, a franchise in respect of the Republic of Ireland may contemplate taking on Northern Ireland.

The franchisor may give the franchisee exclusivity within the territory. This depends on the nature of the product of the circumstances.  Under EU competition law, exclusivity may be granted under the terms of the Vertical Agreements block exemption or in accordance with a competition law analysis of the benefits as against the adverse effect on competition.

Identity and Control

The identity, characteristics and relevant personnel of the franchisee will often be important to the franchisor. It may be provided that the grant of rights is conditional on the continued involvement or employment of the key persons concerned. This requirement is more likely to apply where the franchisee has development obligations and may grant sub-franchises.

If a key person dies or retires, provisions may apply which limit or terminate the rights granted. The key man requirement may be operative only for an initial limited period.

Exceptionally, a sub-franchisor or developer may negotiate the continued involvement of certain key personnel in the franchisor. That person may be critical to the ongoing development of the franchise business.

Setting Up  I

The franchisor’s initial obligations under the agreement, which may be in return for an initial fee, may include the giving of advice on premises, fixtures, and fittings, equipment and establishment.  There may be provision for a launch, furnishing of manuals and training programs and in some cases, a financial package

The franchisor will usually have continuing obligations to provide know-how, advice, and guidance. There may be obligations to provide training to the franchisee’s employees. There will commonly be an annual conference for franchisees.

Training will usually be an essential and key element of what is granted. The operations manual is an important part the training process and the maintenance of ongoing requirements.

The franchisor may second key employees to the franchisee to give intensive training during the setup period. Thereafter, training may be undertaken at a regular interval, commonly at the franchisor’s offices, jointly with other regional franchisees, etc.

Setting Up II

The franchisee will usually undertake to fit out, service, equip and establish a the business premises. There may be obligations to do so in the manner provided by the franchisor. There may be conditions in relation to the use of signs, packaging, and stationery. In some cases, the use of products or branded materials may be required.  There may be a requirement to use particular fittings, equipment etc., which may have to be sourced from the franchisor.

There may be ongoing obligations to maintain the premises. There may be obligations to promote and extend the business.  There may be detailed prescriptive obligations in relation to the operation of the business. There may be ongoing obligations in relation to staff training. There may be a staff uniform.

The franchisor will generally undertake to keep the franchisee aware and apprised of developments in the franchise system. It may provide services and assistance in applying the franchise within the relevant territory. The degree of involvement and assistance by the franchisor will depend on the circumstances and on its remoteness from the territory.

Financial Obligations I

The fee clause will set out the financial obligations.  There may be an initial franchise fee in an amount specified in the agreement. The terms of the initial fee are subject to negotiation. It may be substantial in some cases.

There may be a periodic fee which is a percentage of turnover/ sales.  This is based on gross vat exclusive sales.  There may be an obligation to pay other fees, based on gross receipts or another criterion. Marketing and promotion fees will usually be payable to contribute to common advertising and related costs. This may require a standing order or direct debit.

Financial Obligations II

There are likely to be mechanisms to verify gross sales. They may be automatically monitored at the point of sale.  Records must be maintained to establish and record the gross receipts. The franchisee may be obliged to reports sales by electronic or other means. The franchisor will usually have the right to audit and verify the sales.

The failure to pay the franchise fees will immediately or quickly give the franchisor the right to terminate the master franchise and/ or development agreement. The sum due may be payable immediately or may be postponed in part for a period in order to assist funding in the startup phase. A late payment and / or interest charge is likely to apply.

There may be a margin for failures to meet turnover targets, within particular percentages. A failure which falls a particular percentage below the target might be a material breach, which entitles the franchisor to terminate or restrict the franchise and/or the development agreement.

Payments

The payment of interest outside of Ireland may require the payer to withhold tax and pay it to Revenue.  More generally there are obligations on Irish resident to withhold income tax on many payments outside the jurisdiction to non-residents.

It is generally possible to obtain Revenue approval to pay money out of the country without deduction of tax. The agreement may oblige the franchisee to pay an additional sum to compensate for the effect of the withholding tax obligation.

Payments are usually in the domestic currency.  This raises currency issues in the case of a franchisee abroad.  They are to be converted at the European Central Bank Rate on the business day following the due date.  This may be onerous.  Exchange controls may apply in some jurisdictions.

References and Sources

The Encyclopaedia of Forms and Precedents Vol 16(4)