While there have been some well publicised exceptions, the franchising sector is one which appears to be enjoying a period of relative stability and growth. The Irish Franchise Association recently described its industry as “one of the few growth industry sectors during these recessionary times.”

By entering into a franchise agreement, a franchisor can expand its business quickly at a reduced cost while ensuring that the uniformity and goodwill of that business is protected. At a time when people are wary about taking risks, franchising provides an attractive option to both prospective franchisors and franchisees. Notably, two of the major Irish banks have marketed support finance packages for franchising businesses this year.

There is relatively little legislation directly governing franchising arrangements. Instead, the obligations of the franchisor and the franchisee derive from contracts resulting from negotiation (often on the basis of the franchisor’s template contract).

The main legal issues involved in the negotiation of a franchise agreement include knowing the right issues and questions to address in negotiations and to include in the contract:

• Intellectual property (“IP”) – usually the franchisor will have built up branding and know-how in the form of trade marks, patents, copyright or designs. The franchise agreement will to protect the franchisor’s IP rights. However, the agreement must also ensure adequate access to IP by franchisees for the purposes of carrying on their business.
• Know-how – the franchisor will usually provide the franchisee with a set of detailed procedures and instructions on how to operate the franchise in a franchise manual or handbook. Understanding the obligations involved is essential as failure to comply can result in the loss of the franchise.
• Fees – once the business model is established, the main costs of franchising are passed on to the franchisee and, for this reason, it is an attractive way for a franchisor to expand its business. Franchise fees often include:
  
  • initial fee for becoming part of the franchise network including the right to use the IP rights and benefit from the advice and training of the franchisor;
  • management service fee which is usually a percentage of turnover of the franchise business; and
  • advertising fees by which the franchisee contributes to the overall advertising costs of the franchise network.
• Exit strategy – a franchise agreement usually provides for renewal after an agreed initial term, often for a renewal fee. As many franchisees and franchisors consider their franchise business to be a medium term investment, clauses in the agreement dealing with sale and exit mechanisms are very important.