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Role of a Franchise agreements and your growth strategy

By Wun Wenna

1 PLOT

Know what, or which parts of your business you wish to franchise.
Is it the product or what’s in it?
Is it the entire system or certain parts of the know-how? Are you franchising part of your business or all of your business? What are its selling points? What makes it different? Why would this be attractive to the franchisee? Will you be concurrently developing your product or a part of it, say its brand name? The answers to these questions (and more, this is not an exhaustive list) will help sharpen your focus on which aspects are fundamental to you, and those are likely to require protection. Either by law or by contract or both. For example, the intellectual property associated with your product and business (usually the trademark and trade names) you would want to retain, in order to protect against third parties’ and franchisee’s unauthorised use. Do assets need to be transferred for the successful running of business operations? How about training and marketing, how important are these? How will you transfer the skills required to run the franchise business? How much marketing is required? Can these be reduced to a standard operating manual, or are there parts which should not be shared? Establish what’s important to you, as franchisor. Deal with these issues in the Franchise Agreement. Make clear your stand. If the franchisee is not agreeable to the terms, better to know early than start a relationship and have to unravel further down the line.

 

02 TAKE A PAUSE

Know why you are franchising. Are you building, sharing or giving? Determine the nature of relationship with franchisees. What role does the franchisee play in your plan? Who needs who? To maintain a successful long term relationship, you will need to strike a balance. How much control? Who puts in the resources? Work out the numbers. Make this clear. Set pre-determined parameters, performance targets. Be realistic. When it’s time to part, part amicably. Consider post termination provision such as non-compete provisions. Know your options in each scenario, and make plans accordingly. Set the expectations right. Write all these in the agreement.

 

03 GOING PLACES
Staying local for now? There are no specific laws regulating the ongoing relationship between franchisee and franchisor. Depending on how you structure the relationship with the franchisee, certain legislation may regulate various aspects of franchising, such as the Multi-Level Marketing and Pyramid Selling (Prohibition) Act, Competition Act, Income Tax Act and Unfair Contract Terms Act. Crossing borders, you will need to think about the legal barriers
in each local market such as competition law, restraint of trade, foreign trade and investment regulations (e.g. China and Vietnam), double taxation laws and relief, specific franchisor/ franchisee regulations (e.g. US, Australia) and laws.

04 PLAN AHEAD

Get your structure right from the start. Plan, research and do your homework. Work out your sums. Know your product, and what you need to protect.

Write these in the Franchise Agreement. Start your Franchise Story. Right it.

LEGAL CONSIDERATIONS OF FRANCHISE AGREEMENTS

By Lee Shy Tsong

Senior Partner

Donaldson and Burkinshaw

 

There are many reasons that motivate a franchisor and franchisee to formalize their agreement with a Franchise contract. Benefits of a Franchise agreement are listed below.

  • Allows greater flexibility since parties are free to negotiate terms of the FA and determine scope of agreement
  • May attach ancillary documents, refer to the applicable legislation, provide for alternative dispute resolution through arbitration and mediation clause
  • Allows parties to frame relationship between franchisor, sub-franchisors and franchisees
  • Parties are at liberty to craft the contractual relationship as desired. E.g. Franchisor may choose to deal only with sub-franchisor and transfer certain risks associated with managing the franchisee to the sub-franchisor
  • Allows parties to make provisions for all contemplated circumstances
  • Provide for termination, or restrict/ impose conditions on transfer of interests or rights under the FA
  • No restriction on financial returns to be agreed from the franchising scheme
  • Allows parties to negotiate for the proportioned amount
  • Supplemental terms may be added through addenda, supplemental agreements and side letters
  • Protection of the know-how
  • Can include non-competition clauses or covenants not to compete. May not be entirely effective because of the general public interest for competition. Therefore these clauses will be limited in their scope and duration.