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How to negotiate franchise agreement

KFC in Lagos, Nigeria; An example of franchise aggrement

KFC in Lagos, Nigeria: An example of franchise agreement

Buying a franchise offers advantages to entrepreneurs who are intimidated by starting a business from scratch and are unwilling to buy an existing business. In simple terms a franchise is the right granted by a business owner or inventor (franchisor) to another individual or company (franchisee) allowing the use of its trademark, name, processes, good will etc. in the delivery of a service or sales of goods.

Whilst buying a franchise jump-starts your business by allowing you leverage on existing brand recognition, it is however important to pay attention to the contractual terms of the franchise agreement in order to avoid conflict or loss. Below are some of the basic terms a Franchisee should note when considering a franchise relationship:

A franchise agreement governs the relationship between the Franchisor and the Franchisee and typically documents not only the obligations, responsibilities and rights of the parties but also the licensing of intellectual property to the franchisee. In Nigeria, although there is no particular agency of government with the sole responsibility of managing franchises however the National office of Technology Acquisition and Promotion (NOTAP) has the mandate of registering technology transfer agreements which are typically a form of franchise business model. Some of the important terms of a Franchise agreement include:

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1.Appointment – The agreement should clearly stipulate the appointment of the Franchisee and should also state the territory such an appointment would cover. The Appointment could be exclusive or non-exclusive

2.Grant of License– The agreement should grant the Franchisee the right to use the trademark, copyrights, patents or industrial designs of the Franchisor. This right could also be exclusive or non-exclusive within the defined territory

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3.Duration and Renewal- The agreement should contain the duration of the license and terms of renewal. It is common for the Franchisor to include payment of a renewal fee as a condition precedent.

4.Obligations of the Franchisor- This includes amongst other things the responsibility of providing trade secrets; operating manual; training for key employees; support system; specifications of office/factory plan, signs, fixtures and fittings etc. It is important to also note that the Franchisor is usually responsible for advertising the brand however the Franchisors might be required to pay some money to cover part of advertising costs.

5.Obligations of the Franchisee– This typically includes payment of franchisee fees; compliance with operating manual; keeping of records which the Franchisor has rights to inspect; insurance; obtaining consent of franchisor before selling or sub-licensing the franchise; ensuring the availability of specified working capital; compliance with the structural and internal designs specified by the Franchisor; undertaking not to denigrate the goodwill of the brand; acceptance not sell/offer competing services or products etc.

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Due Diligence

Most Franchisors would typically assess the Franchisee before granting a license, in the same measure it is advisable for the Franchisee to also conduct checks on the Franchisor before executing the agreement. Some of the key things a Franchisee should look out for include:

Profitability of the Franchise
Goodwill and Public Acceptance
Cash Requirements
Monitoring and Support Systems
Adaptability to local market

 

Whilst the franchise model is a safe option for some entrepreneurs, it can also be tricky if parties are not on the same page which is why it is important to critically examine the contractual terms and conduct market research before commencing the franchise relationship.

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