Business And Corporate Lawyers
Franchise Agreements
A franchise agreement is a contract signed between a chain and a private individual who wants to become a franchisee of that chain, that is, manage a branch of it and sell its products. The agreement regulates the relationship between the parties in all aspects and greatly influences the success of the franchise. Therefore, in order to draw up a franchise agreement, it is important to seek advice and legal representation from a law firm specializing in this legal branch.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
What is franchising? (franchise agreements)
Many branches of clothing, food, electronics, etc. chains are managed through franchises. This is a business contract in which a private person receives a right from the chain to sell its products for a franchise fee, that is, a monthly payment to the chain, out of the profits. This transaction, if executed correctly, is an excellent financial opportunity for both parties: the chain enjoys a fixed monthly income without the need to manage the branch and the franchisee receives a working business with an existing reputation whose financial success has already been proven. However, in order for the parties to actually benefit from the fruits of the transaction, they must receive full legal support, starting with receiving advice on the feasibility of the transaction for them and ending with the negotiation of its terms and the drafting of the agreement itself.
Is franchising worthwhile? (franchise agreements)
Franchising has many advantages for the franchisee. This allows him to have an independent business in a short time and he does not build a business from the ground up but receives an existing and working product, which is already successful. The franchisee, therefore, benefits from an existing business reputation, the chain’s trademark, and more. However, along with the prominent advantages, there are also disadvantages. As part of the franchise agreement, the franchisor will be required to conduct himself according to the chain’s requirements, meaning he is not completely independent since he has no freedom of action to manage the business only according to his discretion. Also, the cost of the franchise is not cheap, both in terms of providing a financial guarantee to secure his obligations under the agreement and in terms of monthly payment of a percentage of the proceeds.
franchise agreement
Another type of poison pill mechanism is the allocation of preferred shares to the existing controlling owners. As part of it, when an investor tries to purchase shares above the set threshold, which will give him a majority in the company, preferred shares will be issued to the controlling owners of the company at a reduced price, with the decision of the board of directors. Thus, the amount of shares that the hostile investor can purchase is very small, while the share of the other shareholders in the company increases. It should be noted that a poison pill in this structure prevents several investors from joining forces to take over the company since this mechanism sees them as one entity and not as separate investors.
Agreement Period
A franchise agreement is comprehensive, but three key clauses can be pointed out: the period of the agreement, the franchise fee, and the network’s requirements from the franchisee. A franchise agreement is signed for a limited period and usually includes an option for an extension. The duration of the contract should be suitable for both parties according to their considerations, and for this matter, it is very important that the agreement includes the possibility of early termination of the engagement (regardless of the case of breach of contract). On the part of the franchisor, this option is necessary so he can be released from the franchise in the event of the lack of profitability of the business, and/or the lack of support from the network. On the part of the chain, receiving low revenue is of course also a consideration, but there are also cases of damage to the reputation due to improper conduct by the franchisee, so the potential for damage to the chain is great and it will therefore want to end the relationship with him before the end of the contract.
The franchisor requirements from the franchisee
We mentioned above that as part of a franchise agreement, along with its advantages, the franchisee is deprived of the freedom of business operation and is subject to various requirements of the chain regarding the management of the business. That is, on the one hand, the franchisor is an independent business owner, but on the other hand, he is not allowed to manage the business only as he sees fit, but is subject to the rules of the Franchisor. As part of the franchise agreement, it must be clearly stated exactly what the network’s requirements are from the franchisee so that he can know whether the transaction is profitable for him. This also serves to prevent disagreements between the parties. Among other things, issues such as branch opening hours and the number of employees, product sales policy and promotions, employee training, non-competition, maintaining confidentiality and more must be addressed.
Mor & Co. - Commercial Law Department - Consulting and accompanying chains in franchise agreements
If you own a business that you are considering developing based on a franchise model, we suggest you coordinate a consultation meeting with us to examine all the options that will protect the network and you. Our office is extremely experienced in the areas related to the franchise model.
We invite you to contact us and coordinate a legal consultation meeting for the purpose of reviewing a franchise agreement
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
