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Bulletin

The Fifty Shades of Franchising…

Fasken
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Franchising Bulletin

A few years ago, the President and CEO of a major restaurant franchise network told us that it was easy to open and operate a restaurant, but that it was very difficult to do so profitably.

The same can be said for the drafting of a franchise agreement.

It is indeed very easy today to draft a franchise agreement. Models abound and can even be purchased at low cost on Internet sites.

On the other hand, designing and drafting an agreement that is appropriate to the sector of activity, the specific characteristics, the management, the resources and the mode of operation (current and anticipated) of a new franchisor is an exercise that requires experience, listening and tact, and that implies close collaboration between the managers of the new franchisor and the lawyer called upon to draft the new franchise agreement.

This work begins long before the first clause of the agreement is drafted.

First, it is necessary to choose the business model that best suits the new franchisor, its needs, its projects and its objectives.

In this regard, it is important to recognize that the term “franchise” encompasses a wide range of business models based on a contract between enterprises that are legally independent of each other.

In fact, each industry and, within many industries, each network uses a model specifically designed to meet its needs and operations. In some areas, legislation and industry regulations have also caused networks to adapt their business models to comply with the laws and regulations that govern them.

Thus, networks use various names to qualify their own franchise or affiliation model, including:

  • Franchise
  • Affiliation
  • Banner
  • License
  • Network
  • Chain
  • Group
  • Associate merchants, etc.

Despite their differences, these different business models share the following common characteristics that distinguish the world of franchising and commercial affiliation (whatever the name given to such a network) from other business models:

  1. A network

    The first common characteristic is the fact that it is a network, i.e. a group of many sales or service outlets.

    This network can be of any size, some with only two or three establishments while others have thousands (or even tens of thousands).

  2. A banner or brand

    A second common characteristic is that the network identifies itself under a common banner or brand, which distinguishes the businesses that belong to it from their competitors.

  3. A network leader/manager

    A third common characteristic is the presence of an entity (the “franchisor”) that leads and manages the entire network in order to, among other things, recruit members, hold and preserve the rights to the network’s identity and trademarks, develop and constantly improve its know-how, methods, procedures and tools, develop and expand the network, defend the network against its competitors and ensure a certain level of uniformity in the management, operation and image of the businesses affiliated to the network.

    In some cases, the network members own the network manager, while in the vast majority of situations, the network manager is an enterprise which is independent of the network members.

  4. Members, affiliates or franchisees

    In addition to a leader/manager, a network requires participants or members (“franchisees”).

    Unlike a “corporate” or “branch” network, the members of a franchise or affiliate network are not under the structural control of the network leader/manager (more clearly, they are not subsidiaries or divisions of the network manager). They are instead owned by entrepreneurs other than the network leader/manager.

  5. A legal relationship of collaboration based on one or several agreements

    The last important common feature that distinguishes a franchise or affiliation network from a “corporate” or “branch” type network, which is a corollary of the preceding feature, consists in the fact that the legal relationship between the network leader/manager (the “franchisor”) and the members (the “franchisees”) is based on one or more agreements establishing a form of long-term collaboration between them.

  6. Before even beginning to draft any contract, it is therefore essential to choose the business model that best suits the needs, specific characteristics and objectives of each business that wishes to set up such a network.

    It is at this stage (which many professionals who do not have real expertise in franchising omit or underestimate) that the expertise of the lawyer retained to draft the franchise agreement brings real added value to any new franchisor.

    Sometimes, at the end of this exercise, the company even realizes that franchising is not the most appropriate model for achieving its objectives.

    Secondly, once the appropriate model has been chosen, it is equally important that the franchise agreement be drafted in a manner that adequately meets the needs of the new franchisor.

    At this stage, it is essential to the success and durability of the new network that its agreement(s) be well adapted to its characteristics, resources, management and operating methods.

    By choosing a cheap option (at least in the short term, since it often becomes the most expensive one in the long term), many new franchisors involuntarily place themselves in the uncomfortable position of having to adapt their management and operating methods to a contract that does not really suit them.

    Since the objective of any new franchisor is to have its franchise agreement signed by several franchisees, it will be very difficult, even impossible, to modify the agreements already signed when, some time later, it realizes the flaws, weaknesses, deficiencies and, above all, the provisions that do not suit its business model, the needs of its network and its resources.

    The provisions of an agreement represent the result of multiple choices made, and multiple decisions made, by the executives of the franchisor who had the agreement drafted with the support and advice of the legal experts who drafted it for him.

    As an example, the basic checklist we use to undertake, with a franchisor or prospective franchisor, the design and drafting of a new franchise agreement includes 59 major themes for which choices must be made among more than 160 possibilities, many of which must also be adapted to the new franchisor’s situation based on its sector of activity, management, resources and objectives.

    As a result, the franchise agreement drafted at the end of this exercise reflects the result of many choices made and decisions made by the franchisor, with the assistance of its franchising expert, for the purposes of its franchise network.

    Of the 160 possible choices we discuss with a franchisor throughout the process of designing and drafting his agreement, only the 59 (one per topic) chosen by that franchisor (based on our advice) are therefore reflected in the agreement. The other 101 (which might be preferable for another franchisor) are simply omitted from the agreement.

    A franchisor who chooses to draft, or have drafted, his franchise agreement by a professional who does not have real expertise in franchising is thus depriving himself of a significant number of options and possibilities which might be much more suitable for him.

    Here are three practical tips for drafting a franchise agreement:

    1. Get experts to draft your franchise agreement

      For a franchisor, the franchise agreement is the cornerstone of the entire network.

      Would you copy the entire foundation plans of your neighbour’s factory to build your skyscraper?

      A legal expert in franchising is not only a contract drafter; he or she is above all an indispensable advisor who can inform, assist and guide you in the choice of a franchising model that really suits you, as well as in the design and drafting of a clear and complete franchise agreement that really meets your needs, your operations, your resources and your objectives, and that properly protects your rights and your concept.

      Experience shows that the investment made by a new franchisor in the quality of its contracts is one of, if not the, most profitable in the medium and long term.

      Moreover, even when the network is doing well, it can sometimes be difficult for the franchisor to justify changes (except for minor modifications or adaptations) after several franchise agreements have already been signed, which justifies the investment required to have an excellent agreement from the start. Even more so, if there is tension in the network and distrust has developed on the part of some franchisees (as sometimes happens even in the best networks), the exercise of convincing franchisees of the reasons for more fundamental contractual changes can become a real ordeal.

    2. Read carefully and make sure you understand your franchise agreement

      Even when your franchise agreement has been drafted by an expert in franchise law, it is very important for you to read it carefully, to understand it well and to make sure that it reflects your concept and the management and operation model that you want for your network.

      In this regard, it is important to remember that, since the contract was drafted for you, any difficulty of interpretation, any inconsistency or lack of clarity will be decided by a judge or arbitrator in favour of the franchisee.

    3. Periodically review your franchise agreement

      A franchise agreement is not a static instrument.

      It must be reviewed, updated and modified from time to time to take into account any changes in the law, in the operation of your network, in the market, in technology, in your services, etc.

      Any serious franchisor should therefore plan a periodic review of his franchise agreement, especially in the first few years of the network’s existence, when the experience acquired may require some adaptations and modifications to its operation.

      As a general rule, we recommend an annual review for the first three years of a new network and, thereafter, a review every two years, as well as, in all cases, on the occasion of any significant change.

      This review should first be conducted by the franchisor’s executives and managers and then completed by its franchise law expert.

    Fasken has all the experience and resources necessary to help you draft complete and adequate agreements that protect your rights while avoiding potential pitfalls.

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