Franchise agreement: what to pay attention to

There are still many franchisors on the market who do not offer partners the conditions promised in presentation materials. What points of the franchise agreement should be paid special attention to before concluding it, says Ramil Beydullaev, head of the department of the Sovet Legal Group.

Some franchise owners strive to attract as many partners as possible, promising support in business development and achieving profitability. But when it comes to the contract, everything may turn out to be completely different: little specificity, many prohibitions for franchisees and the absence of franchisor responsibilities.

Let's consider five key points in the contract so as not to waste money and not get bogged down in someone else's business without the possibility of development.

Types of franchising agreement

The first thing you should pay attention to before buying a franchise is — type of proposed contract.

Since there are no special rules on franchising in Russian legislation, the relationship between the owner and the franchise partner can be regulated by one of the following agreements:

• a contract for paid services;
• delivery agreement;
• agency agreement;
• license agreement;
• commercial concession agreement.

The choice of the type of agreement depends on the franchise business model and the list of transferred intellectual property.

But, based on practice, I can say that in classic franchising the parties formalize the relationship by concluding a commercial concession agreement (CCA) or a license agreement (LA).

From a legal point of view, it is recommended to choose CCA. According to it, the franchisee receives the right to use the trademark and other intangible benefits and assets — for example, commercial designation, know-how, design objects, programs and others.

Less preferred option — this is LA. If the franchise owner insists on signing it, he may not have a registered trademark. But it is the trademark and the rights to dispose of it that lie at the heart of franchising. Therefore, make sure that the franchise owner is prompted to enter into a licensing agreement by other reasons, and that he has complete order with the trademark.

Territory of franchise use

It is also worth paying attention to the points about the territory of use of the franchise. They clarify where the franchisee can conduct its activities and how issues of proximity of partner points in the same territory are resolved.

The most profitable option for a franchise partner — this is the assignment to him of an exclusive license or concession (exclusive rights). In this case, the franchisee will be able to develop their outlets in the territory specified in the agreement without competing with the franchisor and other franchisees. This will allow the partner to be the only representative of the network and monopolistically scale their business within a certain area or city.

Conditions about the “security radius” are especially relevant in franchising agreements in the areas of beauty, catering and retail trade.

Obligations of the franchisor

An equally important nuance in the contract is the section with the obligations of the franchise owner. And the first thing you should pay attention to when reading it is — the presence of all guarantees (for example, a payback guarantee) that were stated in the advertising materials.

All obligations of the franchisor must be spelled out clearly and specifically — indicating the volume, order and deadline for their execution. It is important to bring abstract and streamlined points to clear formulations.

Please note that the obligation provided for in the contract has no legal value unless there is a fine for failure to fulfill it. Therefore, each obligation of the franchisor must be supported by a penalty, which is paid by him for each fact or day of violation (depending on the nature of the obligation itself).

Provisions from the “Knowledge Base”

Be sure to read the provisions associated with the so-called “Knowledge Base” (or, in legal terms, — know-how).

Know-how includes information materials with the help of which the franchisee will launch and conduct its activities. Most often, it is know-how that is the main asset of the franchise. Therefore, it is important that all provisions relating to it are spelled out in as much detail as possible. Thus, the contract must contain a detailed thematic list of materials transferred to the franchisee after its signing.

If it is necessary to resolve controversial issues, the franchisee must have evidence that the list of information for doing business was incomplete.

Contract duration

It is important to remember that the validity period of the CCA is limited by the validity period of the trademark, which is transferred as part of a set of exclusive rights. Therefore, the contract must contain guarantees for the timely extension of the validity of the trademark. Also, by concluding an agreement for an indefinite period, the franchisee risks that the franchise owner will be able to terminate it unilaterally, even if the partner did not violate his obligations.

For early termination of the contract, violations on the part of the franchisee must be significant and continuous. Otherwise, the franchisor may abuse its rights and terminate cooperation with the partner in the event of a one-day delay in paying royalties.

In conclusion, I would like to summarize that it is better to take the time and read the contract in full than to lose a considerable amount of money and get into a difficult relationship with the franchisor.