Do you agree?

There are many agreements during the early stages of buying a franchise, Rebecca Jones sums up what you need to know

 

The franchise agreement is the most important agreement you will sign for your franchise business. However there are other early documents you may be asked to sign during the franchisee recruitment process.

The most common of these agreements is a confidentiality agreement and a deposit agreement. These are sometimes known by different names such as a non-disclosure agreement and an intent to proceed or a franchise purchase agreement.

Confidentiality agreement
You may be asked to sign a confidentiality agreement prior to the franchisor releasing any information relating to the business to you. This is to protect the franchisor's brand and to ensure that potential competitors do not steal the franchisor's confidential information.

This agreement will prevent you from misusing or openly disclosing any information you receive from the franchisor, but should allow you to discuss the information with your professional advisers, such as solicitors and accountants, and should make exceptions for publicly available information, or information that you have to disclose by law.

Most confidentiality agreements, prior to the franchise agreement, will not contain restrictive covenants, but you should check this. Restrictive covenants are clauses, eg, stating that you can not compete with the business (even if you do not go ahead with the franchise).

Deposit agreement
Potential franchisees may be required to pay a deposit and sign an agreement before the franchise agreement is signed and any further confidential information about the business is disclosed. If you are asked to pay a deposit, it is in your interests to ensure you have an agreement documenting this, setting out the terms of its return if you do not go ahead.

The deposit agreement may secure a defined territory for a certain length of time. It is essential that when you sign the deposit agreement you make a note of the timescales (if any) in which you need to sign the franchise agreement, if you wish to proceed, as otherwise you may lose the option over that territory or franchise. If at any point the process is delayed, let the franchisor know as soon as possible, so they can discuss your options with you, and if necessary, grant you an extension.

After signing the deposit agreement, you are expected, as a potential franchisee, to review the franchise agreement, assess the business opportunity further, raise funding and speak to existing franchisees.

The deposit payable is usually credited against the franchise fee payable if you proceed. The agreement should also be clear as to the terms and timings of a refund if the franchise agreement is not signed. Under British Franchise Association rules the deposit itself should be refundable, minus any direct expenses of the franchisor if the potential franchisee decides not to go ahead with the franchise. The direct expenses should be set out (and ideally limited) and should not include the franchisor's time and office overheads. Ideally, the full deposit should be refundable if it is the franchisor who decides not to proceed with you as a franchisee (unless this is for good reason, such as a misrepresentation in your application form).

Although the franchise agreement is the key legal document for a prospective franchisee, the intial documents should also be read carefully, so that you understand your obligations in the important period of discovery prior to becoming a franchisee. If there is anything unclear in these early documents, you should ask the franchisor and/or take legal advice before signing them.