Franchising fundamentals

franchise agreement.

 The franchise agreement is an important legal document listing what you can and can’t do when
running the franchise and even after the agreement has ended.

 The franchise agreement is the contract between you and a franchisor. It sets out both party’s rights
and responsibilities in relation to the franchised business, as well as each other.

 Once the agreement is signed, you must follow what it says.

 There may be parts of the agreement which you still have to follow even after it has ended. This could
include paying off any debt you owe to the franchisor or restraints which stop you from operating a
business that was similar to the franchise you used to own.
 The franchise agreement

What is contained in a franchise agreement?

 Not all franchise agreements are exactly the same, but they are very similar across the sector.

 Each franchisor will draft them to meet their own needs and according to their (or their lawyers’)
interpretation of the law and the Franchising Code.

 Look at an example of franchise agreement for your references

Discussion

Myth or fact?

Before they can be used, franchise agreements are approved by the government to make sure they follow
the Franchising Code ?
 What are the implications of signing a franchise agreement?

 Like all legal contracts, if you do not follow what the agreement says, you may be in breach. This
means that you have broken a promise in the contract. If you are in breach, the other party to the
contract (in this case, the franchisor) can take legal action against you.

 The same applies if the franchisor does not follow the agreement. If they are in breach, it means you
can take legal action against them.

 If you sign a franchise agreement, you then may have several days where you can change your mind.
This is called the cooling off period. Once that time has ended, it can be very expensive to end a
franchise agreement early.
 How franchise agreements work in practice

 You should understand what you are getting into

 You should have negotiated changes to parts of the agreement you didn’t like

 You are willing to follow the final agreement that you sign.
 Buying a Franchise vs. an Independent Business
Franchise agreements are for a limited time

Key Difference:
When you buy a franchise, you're buying the right to operate a business under a specific brand and
system. This is different from owning an independent business outright.
Franchise Agreement:
Defines the duration and location of operation.
Specifies operational rules and obligations.
Early Termination:
Possible reasons include non-compliance with the agreement or franchisor insolvency.
Usually, no compensation is provided if the agreement ends prematurely.
 Understanding Franchise Fees

Revenue-Based Fees:
Franchise fees are usually calculated based on your sales (revenue), not profits.
Types of Ongoing Fees:
Fixed Fees: A set amount paid regularly, regardless of sales.
Variable Fees: A percentage of your total sales (royalty).
Combination: Fixed fee plus a variable fee.

The frequency and calculation method for these fees should be clearly outlined in the
franchise agreement.
 Supply Restrictions in Franchise Agreements

What Are Supply Restrictions?

Franchisors often control where franchisees buy their main supplies.
Ensures consistency (e.g., same food taste nationwide).
Key Agreement Terms:
Franchisees must purchase from approved suppliers.
These terms are typically legal but may lead to higher costs for essential supplies.
Advice:
Speak with current and former franchisees to understand the impact of supply restrictions on costs
and operations.
Importance of Operations Manuals in Franchises

What Are Operations Manuals?

Practical guides detailing what franchisees must do and how to do it.
Serve as a reference for running the business effectively.
Relation to Franchise Agreements:
Often referenced within the franchise agreement.
Failure to follow the manual may lead to termination of the agreement.
Key Takeaway:
Understanding and adhering to the operations manual is crucial for franchisees.
Selling a Franchise: Franchisee Rights vs. Franchisor Rights

Franchisee’s Right to Sell:

Franchisees can sell their business during the agreement period, but conditions often apply.
Franchisors usually have the power to approve or reject buyers.
Approval cannot be unreasonably withheld but may be denied if the buyer doesn’t meet the franchisor’s
criteria.
Franchisor's Rights:
Franchisors can typically sell the franchise system or change ownership without requiring franchisee
approval.
Advice:
Before signing a franchise agreement, review the conditions for selling your franchise and the franchisor’s
rights to sell the system.
 Franchise Agreements and Post-Termination Restrictions

Restraint of Trade Clauses:

Many franchise agreements include terms limiting where and when you can work after the
agreement ends.
Example: If you operated a franchised café in a shopping center, the agreement might prohibit you
from opening your own café in the same center for at least 12 months.
Impact on Skills and Experience:
These clauses can prevent you from using the expertise gained during your time as a franchisee.
Legality:
Not all restraint of trade clauses are enforceable or fair.
Support and Training

Franchise Agreements Usually Refer to Support and Training

Importance of Support and Training: Essential, especially for those new to the industry.
Agreement Details: Franchise agreements typically lack detailed information about the level of support
and training provided.
Advice
Discuss your expectations for support and training with the franchisor before signing the agreement.
If these are crucial to you, request to have them explicitly included in the franchise agreement.
Franchise Agreements and Legal Commitments in Vietnam
A franchise agreement is a legally binding document. Once signed, you
are required to follow it under Vietnam’s Contract Law.
However, no clause in the agreement can override or violate other
applicable laws, including:
Consumer Protection Law
Labor Code
Vietnam Franchise Regulations (Decree No. 35/2006/ND-CP and its
amendments).
If parts of the agreement are deemed unfair or invalid, franchisees may
be able to challenge or have them removed by the court if legal
requirements are met.
Advice
Consult a legal expert familiar with franchise regulations in Vietnam
before signing the agreement to ensure your rights are protected.
Disclosure documents
Who are You Doing Business With?
Through disclosure, the franchisor must provide:
 Names of key people, their work history (past 10 years).
 History of the franchise system.
They cannot omit negative relevant information, such as:
o Gaps in work history.
o Previous failed franchises.
o Lack of relevant details.

Advice
Investigate the directors and key staff using reliable, publicly available sources.
Check their past companies and professional track records.
 Has the Franchisor Been in Financial or Legal Trouble?
What They Must Disclose:
Information on current and past legal action.
Any bankruptcy or insolvency history.
Warning Signs:
Franchisees taking legal action against the franchisor.
Previous insolvency issues.
Proven violations of laws by the franchisor.

Advice:
Research current and past court cases involving the franchisor and its related companies.
Is the Franchise System and Franchisor Financially Healthy?

Key Information:
If the franchisor becomes insolvent, franchisees usually receive no compensation.
Disclosure must indicate solvency as of the last financial year.
Franchisors are required to provide financial statements or an independent audited report.
Warning Signs:
Only a solvency statement is provided, without detailed financial statements.
Insufficient information to verify the financial health of the franchise system.
Advice:
Have a qualified accountant or business adviser review all financial information provided.
Is the Franchise System Growing, Shrinking, or Struggling?
Key Information:
High turnover in franchising (many exiting and joining franchisees) is often a warning sign, unlike fast turnover in products.
Disclosure provides insights into the number of franchises that have opened and closed.
Warning Signs:
A high number of franchisees leaving.
Many new franchises sold.
Rapid growth that is difficult to manage.

Advice:
Compare the number of current franchisees to those who have exited.
Talk to both current and former franchisees to understand turnover trends.
 Who Can Tell you How the Franchise Really Works?

Key Information:
Current and former franchisees are the best sources for understanding the franchise system.
Disclosure documents should provide:
Contact details for current franchisees.
Contact details for former franchisees who left within the last 3 financial years.
Warning Sign:
If franchisees are unreachable or unwilling to speak, consider walking away.
Has the Franchise Location Performed Well or Badly in the Past?
When buying an existing franchise, the site history can reveal:
Who operated the site in the last 10 years.
The circumstances of their franchise ending.

Advice:
Use site history and former franchisee contact details to connect with those who’ve operated the location
before you.
Competition and Control

Will you Be Competing for Customers with My Own Franchise System?

 You may be offered an exclusive territory, but exclusivity may have limitations.
Disclosure helps clarify:
 Whether you'll compete with other franchisees or the franchisor.
 If the franchisor can sell online in your area.
 If exclusivity terms can change without your permission.

Can you Shop Around for a Better Deal on Supplies and Stock?
 Franchisors often control where you buy goods and services to ensure quality.
 This may stop you from sourcing cheaper alternatives.
 Disclosure provides details about supply restrictions.
 Advertising and Costs: Key Considerations

How is the franchise advertised?

 Marketing fees are often required in franchise systems.
 Disclosure provides information about the marketing fund and how fees are spent.

advice:
Talk to current franchisees to see if they’re satisfied with how marketing money is spent.

What will you have to pay to set up and run the franchise?
Costs include more than the one-time franchise fee:
Startup costs
Running costs (wages, rent, stock)
Capital expenditures (e.g., refurbishments)
Advice:
Review disclosure for cost details and clarify any missing information with the franchisor.
 Will You Make Any Money?

Key Information:
 Earnings information needs to be reviewed by specialists.
 A franchise being for sale does not guarantee profitability.

Advice:
Have an accountant or business adviser review:
 Financials of the franchised business.
 Financial data of the entire franchise system.
Discussion

By law, franchise agreements have to balance the interests of franchisors and franchisees?

Case study –Discussion

Here are the main takeaways from this lesson.

 Franchise agreements are written by franchisors, and they often protect and benefit franchisors. It’s
up to you to look after your own commercial and legal interests.

 Getting advice will help you understand what you are signing up to, and the risk you are taking on.

 It’s important to talk to current and former franchisees about how the franchise works in real life,
before you sign the agreement.
See you next week