By Jean-Philippe Turgeon
Franchising is a business model specifically designed for the distribution of products and/or services. Its principal characteristic is allowing the franchisee to run a proven business in exchange for complying with uniform operational standards. As such, the viability of a franchise concept relies mainly on its distinctiveness and duplicability, along with the quality of the franchisor’s infrastructure supporting recruitment, training, site selection, the supply chain and marketing.
The franchise agreement provides the contractual side of such an infrastructure, in concert with a disclosure document. The following are the 15 most important provisions in the franchise agreement, which deserve special attention from both the franchisee and legal counsel before the agreement is signed.
1. Restrictions on the establishment
The value of a franchise system is derived primarily from the public’s awareness of the concept and its associated trademarks. This is normally manifested through the growth of (a) the number of franchise locations and territories and (b) sales at each establishment. Both benefit from uniform and standardized operations throughout the network.
For the franchisor to ensure its franchisees are fully committed to the success of their business, it may require each location to be used exclusively for the operations of its concept. Any confusion generated by the operation of other businesses within such establishments could dilute or weaken public awareness of the concept. There could also be negative consequences to co-habiting with a business that is not subject to the same operational requirements.
That said, the joint operation of non-competitive concepts within the same site—commonly referred to as ‘co-branding’—and the concealing of the operation of the franchise concept within an existing business—the so-called ‘fractional franchise’—are recognized business models, too. Examples include a franchise-branded restaurant operated by a hotelier within its own complex, a kiosk serving coffee in a bookstore or a massage therapy clinic operating within a medical office.
The parameters in which they operate must take specific challenges into account. Franchisors that agree to allow their concepts and brands to operate in co-branding and fractional franchise models are careful about selecting the partners with whom they will be associated and need to develop an appropriate infrastructure to serve them. A prudent franchisor will incorporate such aspects of its business as integral parts of its concept and expansion strategy, not just as a means for accommodating a single franchisee.
Save for a few exceptions, however, the operational standards developed by a franchisor are designed for the purpose of distributing products and services in accordance with a specific concept and business model. Any simultaneous distribution of other products or services—even if they are not competing with each other—can be a source of confusion for the franchisee and for the public. It is certainly in a prospective franchisee’s interest to get a very clear picture of the business model before buying in.
By way of example, the franchisor will need to collect separate, independent financial results that are not diluted by other commercial activities, as such information may function in disclosure documents as a business development tool for new franchisees.