Franchising – a viable option in turbulent times?
In the current economic downturn the franchise model could provide an excellent opportunity to expand a successful business or to set up your own business. Franchising is a legal arrangement where one party (the franchisor) grants a licence to another party (the franchisee) for the purpose of retailing its goods or services, often in a specified area or territory.
For a business considering expansion franchising offers an opportunity to expand relatively quickly, and at a reduced cost by passing on all capital costs associated with expansion.
For individuals looking to branch out on their own, franchising may be a low risk means of setting up a business by buying into a proven business format. It is often easier to raise finance to buy a franchise than it is to raise finance to set up business on one’s own account.
From a franchisees point of view it is impossible to underestimate the importance of researching the franchise. The franchisee should also take time to personally visit a few existing franchisees to see how they operate. This research should be done before the franchisee obtains independent legal advice.
Before entering into negotiations both parties would be advised to sign a confidentiality agreement in order to protect sensitive business information and know how. A franchise agreement will govern the relationship between the franchisor and franchisee. A franchisor usually offers a non-negotiable standard contract to all prospective franchisees. The main areas that are generally covered in the agreement are;
• Initial investment required by the franchisee
• Ongoing fees to be paid by the franchisee including advertising, marketing, management and royalty fees
• Renewal rights and transfer rights of the franchisee
• Training and staffing obligations
• Reporting obligations to the franchisor
• Ownership and licensing of intellectual property
• Premises requirements
• Will the franchisee have an exclusive territory?
• What non-complete obligations are being imposed on the franchisee throughout the term of the agreement and after?
• Are there sufficient dispute resolution provisions? A properly drafted alternative dispute resolution clause can result in effective inexpensive dispute resolution
A franchisor should be very careful with the information its’ representatives give prospective franchisees, to ensure that no unauthorised and misleading representations could be relied upon as an inducement to sign the franchise agreement.
In a recent Australian case the franchisee was awarded damages and entitled to rescind a franchise agreement in circumstances where an employee of the franchisor engaged in misleading and deceptive conduct. The Judge found that the franchisee was mislead and relied on oral representations about projected sales figures and the suitability of the franchise premises. The franchisee had signed an acknowledgment, within the body of the franchise agreement, that the written agreement was the entire agreement and no representations outside that agreement could be relied upon. However the Judge found that the franchisor could not rely on the acknowledgement in the agreement signed in “rushed circumstances”.
This case is unlikely to be relied upon in the Irish Courts. However, it provides a useful lesson to all franchisors to ensure that potential franchisees are given accurate and complete information before entering into any franchise agreements. The franchisor should keep detailed records of information given to the franchisee and ensure that the franchisee signs a separate document stating that oral representations are excluded from the contract and listing the specific information he has been given before signing the agreement which can only be relied upon as forming part of the agreement.
If you are interested in either expanding your business by means of a franchise or are considering acquiring a franchise please contact Deirdre McCarthy, Associate dmcarthy@hayes-solicitors.ie