The franchise agreement

A franchise agreement is a commercial collaboration system in which a firm – Franchisor – gives the others – Franchisees – the right to use its distinctive signs, and communicates its know-how on a permanent basis.

The French and EC case law focus on the union of three essential elements, without which the legal qualification of the franchise agreement could not be retained. These obligations are the following:

- The use of a name or of a common sign and a uniformed layout of the premises;
- The communication by the franchisor to the franchisee of a know-how;
- The continuing provision by the franchisor to the franchisee of commercial or technical assistance during the period of the agreement;

Characteristics of franchise agreements

Olivier Gast speaks of 10 rules to be observed in the franchise agreement.

1. Protection of the trademark.

To prevent any action in voidness, the trademark must not only be registered but a serious search should also be made in the register of commerce of the country. A contractual term must allow to avoid trademark counterfeit when the franchisees leave the network.

2. Protection of know-how.

It is better to transfer the know-how in a trickle during the pre contractual period, especially in services: "submarines" exist. Numbered operations manuals must be registered: a bible can be photocopied.

The protection of know-how goes through the signing of a declaration of intent on the observance of confidentiality and then during the pre contractual period of a secrecy agreement providing compensation in the event of disclosure.

Asking a financial guarantee of 50% of entrance fee for example during this period is a good way to retain the franchisee (caution, you must communicate the Disclosure Document at this stage).

3. Payment of royalties.

It’s better to plan a procedure of automatic termination in case of non-payment of royalties, by a registered letter for example.

4. Control.

In the interest of the entire chain, the brand image must be strictly preserved. For example, you can list the points to respect and regularly rate the franchisees based on this list with a tolerance of approximately 20%. This is called the control or report visit.

5. Daily management of the agreement.

It is important to have a written evidence of your collaboration with the franchisee in all phases (training, visiting points of sale ...) in order not to happen to arrive with your " good faith only " to court!

6. Termination Clauses

Non-compliance with the supply exclusivity, non-payment of royalties, no communications of turnover, missed meetings etc ...

7. End of Term Clause

Non-competition or no affiliation (two years in general) and secrecy clauses; resumption of the trademark or franchise buyback.

Regarding the non-competition clause, that clause is “heckled” in case law. Currently, it is better to make it very precise and limited in time and space.

8. Term of the agreement

If it is a fixed term agreement, (between five to ten years depending on the repayment of loans, 7 years is a good average) you can more easily impose on the first generation of franchisees an evolution of the concept.

9. Prices

Only a maximum price may be imposed.

Caution, major reforms are currently underway.

10. Sale of the network.

If the contract contains an “intuitu personae” clause, the franchisee may invoke it to exit the chain at a possible takeover.
Unless you have provided in your franchise agreement that the “intuitu personae” clause is not reciprocal and applies only to franchisee towards the franchisor. In this case the franchisee will be obliged to enforce the franchise agreement he signed, despite the change of franchisor.

From intuitu personae, the clauses of pre-emption and approval resulting from it are perfectly legal.
Many disputes exist within the distribution franchises (“Intermarché”, “Casino”, etc.).. Each group can no longer be developed through creations (Raffarin Act) but this law will be reformed soon, too, the groups tear each other apart trying to "sting" competing franchisees in order to bring them back to their trade sign.

Reservation Contract

Today, the most difficult for franchisors is to find good locations. It is therefore difficult to sign a franchise agreement as the right location is not identified.

The reservation agreement can manage this pre contractual period so that candidates can calmly seek franchise locations in the selected area.

Its option may last two months or more and helps securing the franchisor who during this period knows that the candidate franchisee is bound by the payment of part of the entrance fee.

But if there is a payment of a deposit, the Decree of implementation of the Doubin Law requires the communication of the Disclosure Document.

The reservation agreement which regulates this pre contractual period allows the franchisor to ensure that the candidate franchisee is not a submarine.

The reservation agreement provides the terms of confidentiality and non competition clauses.

Disclosure Document (Pre Contractual Information Document, Doubin Law)

The Disclosure Document must include the history of the franchise, the curriculum vitae of the founders, the state of the network, the number of contracts terminated or not renewed, the prospects of the domestic market, and most importantly, the analysis of the state of the local market (source of most disputes between franchisor and franchisee).

Below is a sample questionnaire for the Disclosure Document, click here to download
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