What is a Franchise Sale Agreement
A franchise sale agreement is an agreement where one party, the franchisor, grants the other party, the franchisee, the right to start a business that uses the name, trademark, marketing and products of the franchisor.
A franchise sale agreement could also occur where a current franchisee wishes to sell their franchised business to another party (but we are going to talk about the first scenario).
There are several differences between selling a franchise and selling a normal business outright. For example, franchisors have a substantial amount of control over the way that franchisees brand, advertise and sell their products. Franchisees licence, rather than own, all of the intellectual property, such as trademarks, that go along with the franchise. This means that franchisees usually have to pay royalties to the franchisor.
Franchise Agreements have limited term
Franchise sale agreements also have a limited duration. Franchisees only have the right to operate the franchise for the duration of the agreement and there is no guarantee that the agreement will be extended or renewed.
Understand all your legal obligations
If you are considering becoming a franchisor, you need to make sure you understand all of your legal responsibilities. The franchise sale agreement must follow the Franchising Code of Conduct. The Australian Consumer Law also governs franchising and prohibits franchisors from taking advantage of franchisees. One of the consequences of this is that you cannot put a clause in the agreement that would allow you to alter the agreement without consulting the franchisee.
However franchise sale agreements need to be flexible. If the franchise agreement term is long, then chances are some business changes will need to be made along the way. So as a franchisor, you will want to draft the agreement carefully so that tweaks can be made throughout the term of the agreement in consultation with the franchisee.
What should be in a Franchise Agreement
Each franchise sale agreement needs to be tailored to the franchise. However some of the terms that should be in the agreement are:
- The parties to the agreement – who is the franchisor and who is the franchisee?
- The nature of the franchise – is the franchisee operating a service business under the name of the franchisor or a site-based franchised with equipment and stock? Is the franchisee limited to one site?
- The term of the agreement – what is the start and end date of the agreement?
- Renewal – how the agreement can be renewed.
- The franchise fees payable – there will be upfront and ongoing fees payable. These include the upfront fee to buy into a franchise, the training fees, costs for stock, store fit-out, royalties and advertising. The fees may be a fixed amount or a percentage of the business’ turnover.
- Territory rights – the franchisee will more than likely want to make sure they are the only franchise operating in the area. However as the franchisor, you may not want to limit the growth potential of your business. This is an important clause to negotiate.
- Lease – whether a lease is needed, for example over a shopfront, and who will hold the lease
- Operation – how the franchisee must operate the business
- Sale of business – Whether the franchisee can sell the business
- Disputes and termination – clauses covering dispute management/resolution and termination of the agreement
As you can tell there is a lot to think about when looking to enter into a franchise agreement with a franchisor, or if you are thinking of selling your current franchise. We can help if you want a safe set of hands.