Tying Down the Legal Issues

A balanced legal agreement is the bedrock of any successful franchise. Once both parties know where they stand legally, the relationship has a much better chance of success, writes Paul Golden.

In order to become a franchisee in Ireland you have to enter into a legal agreement with the franchisor. This agreement is typically known as the franchise agreement and it should achieve three fundamental objectives.

Firstly, given the absence of specific franchise legislation it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon. Secondly, it should seek to protect (for the benefit of both parties) the franchisor's intellectual property including all patents and trademarks that are associated with the brand. Thirdly, it should also clearly set out the rules to be observed by the parties.

 "As there is no specific legislation or regulation governing franchising, apart perhaps from competition law, the franchise agreement will become an all important tool in determining the exact nature of the rights and obligations of the franchisor and the franchisee and the nature of the relationship between them," explained  franchise expert and solicitor Bill Holohan of Bill Holohan & Associates.

 Jeanne Kelly, a partner in another legal firm, Mason Hayes Curran says that while her company tends to look mostly from the perspective of the franchisor rather than the franchisee, the quality of the underlying brand is a key consideration for the latter.

 "There are some franchises that seem to be geared towards getting as much money up front as possible. But if there is no operations manual, for example, that indicates they are not ready to sign a franchise agreement."

 Another process undertaken by legal advisers is to check if the company has spent time or money on what it is licensing and has investigated registration of trademarks. "Franchisees need to conduct their own diligence and one of the things we ask is whether the intellectual property is being actively policed - if not the network will become weaker over time," she said.

Bill Holohan pointed out that many franchisees would purchase a particular franchise opportunity because of its profile. "In many cases a franchisee has a choice of franchises to purchase in the same market sector and one of the reasons why they will have chosen a particular brand is because of its strong brand image."

"If the contract is weak on this point, franchisees will not consider that particular opportunity to be a sound investment proposition because the franchisor will be limited in what they can do to prevent a copycat operation from setting up in direct competition," he added.

Jeanne Kelly said that as a franchisee, she would expect the agreement to be consistent across all parts of the country and for there to be a clearly defined territory for each agreement.

"You should also ask if the franchise is a member of the British or Irish franchise associations. If it is, this indicates that it is engaging with the industry in a meaningful way and is able to exchange information on best practice with other businesses. For many people this will be their first experience of running a business so this type of interaction is helpful."

 All franchisees should be treated as a family and as such there should be no room for favourites, agreed Bill Holohan. "The franchise agreement should be in a standard form with all prospective franchisees being offered the same terms with no special deals. If the agreement is to be non-negotiable, it is important from the franchisee's point of view that it is well balanced in terms of the rights and obligations of all parties and takes into account the franchisee's concerns also," he says.

 While franchises typically have a success rate of around 90%, this still means that a sizeable number fail each year. When asked to comment on the importance of a clearly defined exit route in case the relationship does not work out, Jeanne Kelly advised that the contract should include minimum but clear requirements that would trigger an exit. For example, she adds, the franchisor would need to be able to terminate the agreement if there were a series of breaches of the terms.

The length of agreement varies from business to business, but should be long enough to give the franchisee a chance to earn back their initial investment and make some money. "If you are paying a large upfront fee I would expect to see a good level of clarity in terms of renewal," she concluded. The minimum term for most food franchises is 10 years, but we have seen some five year agreements, which is a very short period of time for the franchisee to make their money back, especially for those who have paid a six figure fee."

Daniel Cashman, head of the franchising unit at Beauchamps Solicitors recommends that any Irish franchise with overseas aspirations should carefully consider the requirements for disclosure in its target markets.

Disclosure laws require franchise companies to reveal detailed information about their business, including how many have failed and why. They are designed to protect potential franchisees by ensuring the information they base their investment decision on (and which is made available via a public register) is comprehensive and up to date.

The administrative and cost implications of these laws are already considerable and likely to increase in the future, warned Cashman. "In the US there are uniform commercial code or UCC fillings, which are more detailed than anything you will come across in Europe, although Belgium and Italy have franchise laws and there is also a law in Spain that applies to franchises. To date these are to be found only in the civil law countries, although there has been talk of a franchise code at EU level."

The cost of complying with UCC legislation could amount to tens of thousands of euro since separate fillings are required in each state in which the franchise operates. In contrast the UK (like Ireland) operates a common law framework and has also adopted a self-regulation stance on the franchise industry, although Cashman suggests retaining local legal representation in any overseas market.

On the plus side, agreements with franchisees are fairly uniform and it is often possible for the business to operate on a similar legal structure across multiple territories. "Most of the rest is common sense, such as complying with the laws of the land," he concluded.

Finally, remember that once an agreement has been signed, both parties are bound by it, which can be a double-edged sword, warned Bill Holohan. "Generally speaking there is no law against making a bad deal."

first published in Franchise Options Magazine Summer 2008 - to order back issues please call 01 6611660