Franchise Deals Under the Microscope: What Every Franchisee Should Check Before Signing A Business Commitment

Signing a franchise agreement is not simply a formality that follows a commercial decision to buy a franchise. It is the document that defines how the business will operate, what the franchisee can and cannot do, how much the relationship will cost and what happens if either side wants to end it.

 

For a prospective franchisee, the most important task is therefore to examine the agreement as a whole rather than focusing only on the initial franchise fee or the brand's reputation. A franchise may appear financially attractive at the outset but become considerably more expensive or restrictive once royalties, marketing contributions, renewal charges, purchasing requirements and other contractual obligations are taken into account.

 

The agreement should also be reviewed against the franchisee's business plan. Projected sales, staffing costs, rent and other operating expenses should be considered alongside contractual payments and restrictions. Where the contract differs significantly from representations made during negotiations, the discrepancy should be resolved before signing.

 

Fees And Royalties Need Careful Examination

 

The financial provisions are among the first clauses a franchisee should scrutinise. The agreement may require an initial franchise fee, ongoing royalties, advertising or marketing contributions, technology charges, training fees, renewal fees and other payments. Some charges may be fixed, while others could be calculated as a percentage of gross sales or another measure.

 

A franchisee should establish exactly when each payment becomes due and whether additional costs can be imposed during the term. It is also important to determine whether royalties are payable on gross revenue regardless of profitability. A business generating high turnover but low margins could still face substantial royalty obligations.

 

The agreement should make clear whether fees are refundable, whether they can increase and whether the franchisor has the contractual right to introduce new charges. Clauses allowing unilateral changes deserve particular attention because they could materially alter the economics of the franchise after the business has been established.

 

Territory And Exclusivity Can Shape The Investment

 

Territorial rights are another central issue. A franchise agreement may identify a geographical area in which the franchisee is permitted to operate, but the precise meaning of that territory can vary significantly between agreements.

 

A franchisee should determine whether the territory is exclusive, protected or merely allocated for operational purposes. If exclusivity is promised, the contract should clearly state what the franchisor is prohibited from doing within the territory.

 

Questions should also be asked about online sales, mobile applications, delivery platforms and customers who purchase from outside the territory. A franchisor might reserve the right to sell directly through digital channels or award another franchise within an area that the franchisee assumed was protected.

 

The size and nature of the territory should also be assessed against the financial projections. A large geographical area may offer protection on paper but have little commercial value if the customer base is limited.

 

Performance Obligations Can Affect Control

 

Franchise agreements commonly impose performance standards designed to protect the brand. These may cover minimum sales, operating hours, staffing, training, customer service, premises, equipment, product ranges and quality standards.

 

Such obligations are not necessarily unusual, but a franchisee should understand which requirements are contractual and what happens if they are not met. A failure to achieve a sales target, for example, could trigger warnings, additional obligations, loss of territorial protection or even termination depending on the wording of the agreement.

 

The franchisee should also examine whether the franchisor can change operational standards during the contract. A requirement to refurbish premises or purchase new equipment may represent a significant unplanned investment.

 

Where performance targets are included, the assumptions behind them should be tested carefully. Targets that appear achievable during negotiations may become difficult to meet because of changes in rent, competition, market conditions or other operating costs.

 

Renewal Rights Should Not Be Assumed

 

The end of the initial term can be just as important as the beginning. Franchise agreements commonly run for a fixed period, after which the franchisee may have a right to renew subject to specified conditions.

 

A renewal clause should be examined closely rather than treated as an automatic extension. The franchisee may have to give notice within a particular period, pay a renewal fee, sign the franchisor's then-current agreement, meet performance requirements or upgrade the premises.

 

The requirement to sign a new agreement can be particularly significant. The terms available at renewal may differ from those in the original contract, potentially affecting fees, territory, operating standards and other rights.

 

A franchisee should therefore understand not only whether renewal is available but also the conditions attached to it and the financial consequences of exercising the right.

 

Termination Provisions Need Particular Attention

 

Termination is one of the most consequential sections of a franchise agreement. It establishes when the franchisor or franchisee can end the relationship and whether the party in breach has an opportunity to correct the problem.

 

Some breaches may be capable of being cured within a specified period after receiving notice, while other events may permit immediate termination. These could include serious contractual breaches, insolvency, misuse of intellectual property or conduct that causes significant damage to the brand.

 

The franchisee should identify every circumstance that could lead to termination and determine whether notice and a cure period apply. Vague or broadly drafted termination rights can create uncertainty, particularly where the franchisor has substantial discretion.

 

The consequences of termination should also be examined. The agreement may require the franchisee to stop using trademarks, return confidential information, remove branding, dispose of inventory, transfer assets or assist with the transition of customers and operations.

 

Post-Termination Restrictions Can Continue

 

The franchisee's obligations may not end when the agreement expires or is terminated. Post-termination provisions can impose continuing restrictions on the former franchisee.

 

A non-compete clause may restrict the franchisee from operating a competing business for a particular period or within a defined geographical area. There may also be non-solicitation provisions concerning customers, employees or suppliers.

 

The enforceability and permissible scope of such restrictions depend on the applicable law and circumstances. A franchisee should nevertheless identify them before signing because they can affect future business plans and the value of the experience and investment built during the franchise term.

 

Confidentiality obligations and restrictions on the use of the franchisor's intellectual property may also continue after termination. These provisions should be distinguished from restrictions that affect the franchisee's ability to conduct an entirely separate business.

 

Intellectual Property And Operating Manuals Matter

 

The franchisee is generally obtaining the right to use a business system, brand and intellectual property rather than purchasing ownership of those assets. The agreement should therefore specify the scope of the licence and the conditions governing its use.

 

Trademark requirements, approved suppliers, advertising materials, software and operating manuals may all form part of the franchise system. The franchisee should understand whether the franchisor can modify manuals and operational requirements during the term.

 

Changes to the operating system can have financial implications. A contractual obligation to comply with updated standards could require additional staff training, technology investment, equipment or refurbishment.

 

Dispute Resolution And Governing Law

 

Dispute-resolution provisions determine where and how disagreements will be handled. A franchise agreement may provide for negotiation, mediation, arbitration or court proceedings, either individually or in combination.

 

The agreement should identify the applicable procedure, location and rules. Arbitration can involve different costs and procedural considerations from court litigation, while a foreign jurisdiction can make a dispute considerably more complicated for a franchisee operating in another country.

 

Governing law is equally important. The law chosen in the agreement determines the legal framework used to interpret contractual rights and obligations, subject to applicable mandatory rules. A franchisee should not assume that the law of the country where the outlet operates will automatically govern every aspect of the relationship.

 

Jurisdiction clauses should also be examined alongside governing-law provisions. A contract could, for example, select the law of one country while requiring disputes to be resolved in another.

 

Representations Should Match The Contract

 

Before signing, a franchisee should compare the final agreement with the information provided during negotiations. Statements concerning projected turnover, territory, expected investment, support, staffing requirements or exclusivity can influence the decision to invest.

 

If an important commercial promise does not appear in the contract, the franchisee should seek clarification and appropriate contractual protection rather than relying solely on informal assurances.

 

The agreement should also be checked for incorporated documents. Franchise manuals, schedules, fee tables, territory maps, development plans and other documents may form part of the contractual framework. A franchisee should obtain and review documents that the agreement expressly incorporates before signing.

 

Professional Review Can Identify Hidden Exposure

 

A franchise agreement can contain dozens of interconnected provisions, meaning that an apparently minor clause may have significant commercial consequences when read alongside another provision. A franchisee should therefore consider obtaining independent legal and financial advice before signing, particularly where the investment is substantial or the agreement is governed by unfamiliar laws.

 

The objective is not necessarily to eliminate every obligation or negotiate every clause. Rather, the franchisee should understand the rights being acquired, the commitments being assumed and the circumstances in which those rights could be lost.

 

A careful review should ultimately answer a straightforward question: if the relationship does not develop as expected, what does the contract require the franchisee to do? Understanding that answer before signing can help prevent costly surprises after the business is already operating.

 

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
For enquiries or further information, contact ask@tlr.ae or call +971 52 644 3004. Follow The Law Reporters on WhatsApp Channels.