Top Ten Legal Priorities When Franchising Your Business
- Protect your intellectual property (IP)
As a franchisor, your IP is one of your most valuable assets. It is vitally important that you take all necessary steps legally to protect your IP, including:
- Registering your trade marks with the intellectual property office
- Ensuring that any designers or other third parties that have helped create your IP have assigned all legal rights to you
- Licence all necessary IP rights into your franchisor company, keeping ownership in a separate legal entity
- Make sure that your franchise agreement contains all necessary clauses to protect your IP
- Confidentiality agreement/non-disclosure agreement (NDA)
When dealing with prospective franchisees, before you provide them with any confidential information, ensure that they have signed a properly drafted confidentiality agreement/NDA.
- Deposit letter/agreement
When a prospective franchisee pays a deposit, always ensure that they sign a deposit letter or agreement setting out the basis on which the deposit has been paid, including whether it is refundable if they do not proceed. This will hopefully avoid disputes arising if they do not proceed with your franchise.
- Franchise Information Memorandum (FIM)
Whilst it is not compulsory legally in the UK to provide prospective franchisees with a FIM, it is advisable. A carefully drafted FIM that has been checked by an experienced franchise lawyer will help ensure that your franchisees are fully informed about the franchise that they are proposing to buy. This will hopefully mean that disputes with franchisees are reduced and that, if they arise, you are in a strong position legally.
- Franchise agreement
Always use a bespoke franchise agreement that has been drafted for you by an experienced franchise lawyer. Avoid the temptation to download free templates off the internet. Any saving that you make by using a free template will be dwarfed by the legal costs that you will incur if you end up in dispute with a franchisee, particularly if your franchise agreement does not give you proper protection legally.
- Side letter
If you agree to make any special allowances for a particular franchisee, ensure that any deviations from your standard franchise agreement are properly recorded in a side letter to the franchise agreement. This will ensure that the terms of your agreement with the franchisee are properly documented, therefore hopefully avoiding any misunderstandings further down the line.
- Renewals and re-sales
Renewals and franchise re-sales can be quite complex legally. Always ensure that your renewal and re-sale policies are clearly set out in your franchise agreement, operations manual or separate policies. Also, consider including an obligation on your franchisees to pay your legal costs in relation to either renewals or re-sales.
- Operations Manual updates
Ensure that any updates to your operations manual are properly communicated to your franchisees and that you keep a record that you have done so. This will avoid franchisees trying to say at a later date that they were not aware of the change.
- Franchisee default
You should deal swiftly and firmly with franchisee default, whether the franchise agreement, operations manual or system generally. If you don’t then franchisees may begin to think that they can do what they want. If you have any doubts as to your position legally, take advice from an experienced franchise lawyer. By seeking legal advice early on, you can hopefully avoid being faced with a costly dispute.
- Non-compete covenants
Following the termination or expiry of a franchise agreement, always write to the departing franchisee to remind them of their post termination obligations under the franchise agreement, including the non-compete covenants. If, in spite of your letter, former franchisees do not abide by their post termination legal obligations, you should take appropriate legal action in order to protect your brand and franchise model.
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