Despite all the questionnaires, evaluations, psychometric tests and other franchisee selection tools, it often remains difficult for a franchisor to properly assess the likelihood that an applicant will succeed in integrating the franchise network and be a successful franchisee.
This risk, however, does not prevent most franchisors from signing with their new franchisees long-term (5, 10 or 20-years) franchise agreements, which also often include one or more renewal options, only to realize a few weeks or months later that some of them don't really function well within the network, without necessarily breaching their legal obligations to the franchisor.
So, from time to time, a franchisor and a franchisee find themselves bound to each other by an unsuitable long-term agreement, which does not augur well for their relationship or the harmonious evolution of the franchise network.
Is there a way to prevent such unfortunate situations?
Yes, there are a few, including agreeing with the new franchisee on an initial trial period during which either the franchisor or the franchisee may terminate the contract upon simple notice and without having to justify any reason for so doing.
Somewhat like an engagement prior to entering a longer commitment like marriage.
This tool allows the franchisor to limit the risk, without having to incur significant legal costs, of a negative impact to its network and image that might be caused by a new franchisee who fails to comply with its standards, rules and procedures.
For a new franchisee, this formula helps limit financial losses where it realizes, weeks or months later, that this type of business or franchise is not suitable for him or that she, or he, cannot properly operate it as a franchisee.
However, any such initial trial period can lead to temporary instability in the network, especially if there are several new franchisees at the same time. It also implies that the franchisor has the necessary financial resources to deal with the consequences of the possible withdrawal of the new franchisee during or at the expiry of the trial period.
Any such trial period can be included in specific provisions in the franchise agreement itself or, even better in my humble opinion, in a separate agreement whose term is limited to the trial period.
The term of any such initial trial period is usually from six to eighteen months.
Some of these trial period agreements or clauses also set out specific criteria that must be satisfied before a party can terminate the contract, for example, regarding performance or, more precisely, non-performance. Any such criteria or circumstances should be very clearly described in the agreement, leaving little room for interpretation when applied.
A unilateral trial period can also be stipulated in favour of just the franchisor or the franchisee, although there is a certain risk that a trial period in favour of the franchisor alone may be struck out by a court as an "abusive clause" in an "adhesion contract".
In all cases, the clause should very clearly describe what happens in the event either party terminates the contract during the trial period. It should include, in particular, details on the franchisor's repurchasing the franchisee's assets, taking over major contracts entered into by the franchisee (such as the franchisee's lease) and its obligations to employees, as well the full or partial reimbursement of the initial franchise fee paid by the franchisee and any unspent portion of the advertising fees already paid by the franchisee.
Confidentiality, non-solicitation and non-competition agreements for the franchisee should also be fully addressed should the franchise be ended during or at the expiry of the trial period. This avoids the risk of a new franchisee taking advantage from the know-how or trade secrets acquired during the trial period to subsequently compete with the franchise network.
It is not enough to merely refer back to clauses in the franchise agreement that apply when the contract is terminated due to the franchisee's breach, because there is no breach.
It is also important that any clauses describing the consequences of a termination by either party during or at the expiry of the trial period be reasonable, given that the termination is not caused by a contractual breach by either party.
Such trial periods are currently rarely used in single-unit franchise agreements (although they could very well be used more frequently), but are much more common in multi-unit franchise agreements, area development agreements and master franchise agreements, where they can be extremely useful.
Fasken has all the expertise and resources needed to help you properly develop, plan, draft and implement agreements with your franchisees, be they single-unit franchisees, multi-unit franchisees, area developers or master franchisees.
