Key legal considerations to look out for in a franchise contract

Many businesses in Nigeria and abroad often leverage on franchising in order to sustainably grow their businesses. This is because franchising allows businesses successfully replicate their business model, expand their brand, increase their market share and consequently increase market profit.

Franchising may be defined as an agreement between two parties whereby one party (the franchisor) grants a license to another party (the franchisee) to operate a business under the franchisor’s brand and sell its products or services. The intellectual property, branding, and licensing rights are sold to the franchisee by the franchisor.

A well-written franchise contract safeguards the brand of a franchisor. It guarantees uniformity at all of the franchisor’s sites and explains the rights and responsibilities of both the franchisor and the franchisee under the franchise contract.

The key legal considerations to look out for in a franchise contract generally include:

• Territorial rights: When drafting a franchise agreement, it is necessary to delineate the territory which the franchisee is allowed to operate the franchise business. Territory and exclusivity are relevant because it determines the market share and gives the particular franchisee a competitive edge over other franchisees. The franchisor on the other hand should define the territory in a way that would not inhibit him/ her from expanding the franchise network. There should be a balance between the franchisee’s need for growth and profitability and the franchisor’s need for flexibility.

• Quality standards: In order to protect the franchisor’s brand image and the customer experience attributed to the brand, it is important to include in the franchise agreement quality standards and rules that ensure the franchisee preserves the reputation of the franchise. This may include product/service specifications, health and safety measures, operational guidelines, customer service policies and environmental duties.

• Training and Support: The franchise agreement may create an obligation on the part of the franchisor to provide training and support to the franchisee with respect to marketing, business development, or other services. This is to ensure consistency across the franchise network and customer satisfaction.

• Franchisee payments: The franchise agreement should state the amount of the franchise fee and percentage of royalty payments to be made to the franchisor. The franchise fee and royalty should reflect the value of the franchisor’s brand as well as training and support offered by the franchisor. The franchisor may also include terms for the payment of advertising fee which is usually a portion of the gross sales/revenue or a fixed amount.

• Advertising standards: The terms as to the advertising requirements for the franchisee when promoting the franchisor’s products may be included in the franchise agreement.

• Insurance requirements: To protect the business from unforeseen losses and liabilities, the franchisor may include an obligation on the part of the franchisee to insure against such losses and liabilities.

A carefully drafted franchise contract sets the tone for a sustainable relationship between the franchisor and franchisee which boosts the franchisor’s brand and ensures the franchisee’s growth and profitability.

Article written by Adeife Omolumo. Adeife is an associate in the Corporate and Commercial law practice group at the Trusted Advisors.