In cooperation with Cerca, Cecile Peskine revisits, in an accessible way, the fundamentals of franchise law through videos.
“What clauses must each party fully understand before signing?
All clauses in a franchise agreement are important and must be understood by both parties before signing; this is really important. Now, if we have to focus on certain clauses, then obviously it will depend on whether we are on the franchisee or franchisor side. From the franchisor’s point of view, the essential clauses of the contract that, in my opinion, should not be deviated from are all those clauses that are intended to protect the know-how. Therefore, all of the franchisee’s commitments to undergo training, respect the know-how, respect changes made to the know-how, respect the brand image and respect the supply arrangements provided by the franchisor are very important clauses that must be included in the contract and are non-negotiable. I think this is essential. The second type of clause that is really fundamental for the franchisor are clauses, which is a Latin word, related to intuitus personae. The franchisee is expected to make a personal commitment.
We will choose an ambassador for the brand, and if the franchisee ever wants to sell their business or bring in third parties who were not involved at the outset, the franchisor must be able to approve them. They must have a completely discretionary and even discriminatory right of veto. They must be able to say, ‘I don’t like so-and-so, I refuse to allow the franchise business to be sold to that person.’ So all these clauses relating to sessions and transfers on the franchisor’s side are fundamental. On the rest, I also think it’s always good to have fairly consistent financial conditions across the network, particularly in terms of royalties.
The royalties paid to the franchisor make it difficult to explain why franchisee A will pay a lower royalty than franchisee B, so it is really important for the whole network to have fairly consistent pricing conditions. These are the important clauses from the franchisor’s point of view. There are many others, but I have mentioned a few.
From the franchisee’s point of view, I think it is essential to pay close attention to the non-competition clause. The non-competition clause is the clause under which the franchisee undertakes not to engage in any other competing activity. It is important to look at how it is worded. If it is worded very broadly and covers, for example, the entire restaurant industry, or if it is specific to the type of restaurant that is the subject of the franchise agreement. That is one example. So that seems to me to be an important point to consider. Especially since this non-competition clause may apply after the end of the agreement. So here too, the franchisee needs to have anticipated this. The second type of clause that franchisees need to be aware of is any clause that provides for the payment of financial compensation. This includes entry fee clauses, since the franchisee will pay an entry fee to the franchisor. It also includes royalties and communication fees, but not only these. There are many costs that are sometimes hidden in the franchise agreement, such as those related to mandatory software. Today, there is a lot of software that is imposed by the networks, so the franchisee must be able to anticipate all these costs in their business plan. And then there are all the costs related to purchases. »