January 1, 2003
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*While a franchise agreement is a critical document and should be carefully reviewed by a lawyer before it is signed, a franchisee should remember that:

1. The balance of power is usually significantly in favor of the franchisor and, therefore, so are the terms and conditions of most franchise agreements;

2. Not even the best franchise agreement offers absolute protection to a franchisee against an unscrupulous franchisor;

3. In the event of a dispute between a franchisor and a franchisee, most franchisors have a lot more time and money than franchisees to fight a protracted court battle.

So, a franchise agreement cannot and should not take the place of detailed and thorough due diligence by the franchisee before entering into the franchise agreement.

Term/Renewal

  • Initial term how long? 5 years? 10 years?
  • Right to Renew? How long? 5 years? 10 years? Additional Fee Required? Can franchisor amend franchise agreement, royalties and other terms and conditions on renewal?

Territory

  • Exclusive or non-exclusive
  • Clearly defined
  • Right of first refusal for adjoining territories

Franchise Fees/Royalties

  • What percentage?
  • Definition of “sales”.
  • When payable?
  • Advertising or other fees? Is franchisee required to contribute to a national advertising campaign?
  • Will advertising be conducted in territory? Does franchisee have to spend a minimum amount perannum on local advertising? Does franchisee require franchisor’s approval with respect to advertising?

Manual / System

  • Strict compliance with system, the franchisor’s specifications and the operating manual.
  • Standards in dealing with public.
  • Sale of products and provision of services specified by franchisor.
  • Purchase of inventory, supplies and equipment from the franchisor or franchisor-approved suppliers.
  • Requirement to use the franchisor’s trade marks and logos on all products.
  • Hours of operation.
  • Maintaining the condition of the premises and all equipment at a specified standard.
  • No alteration of business premises without franchisor’s consent.
  • Participation in promotion initiated by Franchisor.
  • Requirement to refurbish premises from time to time.
  • Is principal required to work full time in business?
  • Minimum levels of working capital and/or inventory.

Franchisor’s Obligations

  • Assistance in site selection.
  • Assistance in construction of the business premises or construction of a turnkey operation.
  • Initial training. On-going training. Who pays?

Site

  • Does franchisee have to own business premises?
  • Does franchisee have to lease business premises? Will franchisee hold head lease or will franchisor hold head lease and franchisee sublease from franchisor?

Accounting

  • Reports, records, financial statements and audits. How often must reports be submitted? Does franchisor have full access to franchisees books?
  • Is franchisee obliged to purchase uniform software? What is the cost?

Non-Competition/Confidentiality

  • Both during and after termination of franchise agreement.
  • For how long after franchise agreement terminated?
  • In what territory?
  • Non solicitation of employees of the franchisor, the franchisee or other franchisees.

Trademarks

  • Franchisor absolute owner of trade marks.
  • Franchisee obliged to prominently display trade marks of the franchisor and use franchisor’s signage.
  • Franchisee must report infringements of trademarks to franchisor.

Personal Guarantee/Security

  • Required? For how long?
  • Is guarantee capped?
  • Is spouse obliged to sign guarantee?
  • Security required? General Security Agreement over all assets of the franchised business? Mortgage on home? Letter of Credit?

Insurance and Indemnity

  • Types of insurance franchisee required to obtain.
  • Franchisor approval of insurance.
  • Copies of insurance to be given to the franchisor.
  • Franchisee to indemnify franchisor with respect to the operation of the franchised business.

Death or Incapacitation of Franchisee

  • Can franchised business be passed on to spouse, children or other heirs on death? If so, any fee to be paid or agreements to be signed?
  • Does franchisor have right to buy back the franchised business? If so, at what price?

Sale and Assignment

  • Franchisor can assign franchise agreement at any time.
  • Franchisee can assign franchise agreement only with franchisor’s consent. On what basis can franchisor withhold consent?
  • Does franchisor have right of first refusal to purchase franchised business? At what price?
  • Sale or assignment deemed to include transfer of control of corporate franchisee or change in partnership.
  • Franchisee not permitted to mortgage or pledge assets or the franchise agreement without franchisor’s consent.

Termination

  • Events of default.
  • Can franchise agreement be terminated immediately or is franchisor obliged to give notice of default and provide the franchisee with a reasonable period of time to remedy?
  • Effect of termination.
  • Franchisor’s right to purchase franchise business on termination.

Miscellaneous

  • Interest on overdue accounts.
  • Non-withholding of payments and non-setoff.
  • Notice. To whom? And how much?
  • Applicable law?
  • Are disputes to be arbitrated or mediated first?
  • Four corners clause – entire agreement.
  • Force majeure (include terrorism?)
This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Business Law