Franchising is a business relationship between two parties, franchisor and franchisee, for which the first gives the rights to use its trade as well as its know-how to the second in exchange for a royalty or financial consideration. Normally, these contracts also include training and support from the franchisor to the franchisee.
The regulation of franchising is quite limited in Spanish law since this entity draws from an assumption of contractual freedom between the parties under Article 1.255 of the Spanish Civil Code. Therefore, the regulation of this type of entity corresponding to the contractual agreement between the parties is of vital importance to the development of the business.
Commonly, the parties’ lack of legal knowledge may lead to agreeing to certain obligations and commitments they may not be aware of or contracts that do not include rights they agreed upon.
Sometimes franchisors are reluctant to change the existing model agreement whereby the prospective franchisee does not understand its legal meaning before signing the agreement. However, it is vital that before the development of the business and carrying out investments, the franchisee is aware of the obligations and limitations they may be encountering.
On the other hand, the franchisor is jeopardizing the fundamental value of its business, as well as its image. Additionally, by the exclusivity that accompanies this type of business, the franchisor usually limits the geographical area available to develop the business using the franchising activity. All this means is that the franchisor must be protected from potential franchisees that could jeopardize its image or limit the business development in certain areas. Moreover, before signing, it is advisable to check if the obligations the franchisor is assuming are feasible in practice.
Some of the most important clauses to keep in mind are:
- Grounds for termination of a contract: from the point of view of the franchisee, it should be noted that if not negotiated properly these clauses could provoke serious problems, such as sanctions disproportionate to the harm caused or contractual terminations without sufficiently substantiated reasons not to allow a refund of the corresponding investments. The franchisor is interested in having the power to rescind the contract if the franchisee does not fit the business model and is damaging its brand image.
- Clause to meet certain minimum targets: from the point of view of the franchisee, placing business targets too high could mean not meeting objectives and causing serious problems, such as termination of the contract or the imposition of sanctions. For the franchisor, this clause can be vital, especially when granting exclusivity that will limit further growth of the business in an area where there is already a franchisee. In this case, the franchisor will be interested in the franchisee continuing only if it meets the minimum targets.
- Duration of the contract: the contract has to have sufficient duration to allow recovery of investments made by the franchisee. Both parties must be aware of the obligation they normally assumed to continue fulfilling the contract until its expiration.
- The obligation of the franchisor: the franchisee must verify that the expected support from the franchisor is well stated in this clause, without including general statements that are difficult to enforce in practice. The franchisor must assess whether the obligations laid down can be fulfilled throughout the life of the franchise.
- Price: This is an obvious key point for both parties. There is no regulation on the pricing type, it can be fixed or variable (usually depending on the results of the franchisee). Furthermore, it is very common to set an initial franchisee fee.
- Post-contractual obligations: usually a post-contractual non-competition agreement is included, which the franchisee must be aware of and evaluate before starting the business. This agreement must comply with existing regulations to be valid.
We conclude that it is advisable to consult legal counsel before the signing of any franchisee agreement, which would involve:
- thoroughly checking each of the clauses of the contract
- providing advice during the negotiation of the contract
- providing all possible information regarding the contract to be signed to avoid future problems
Joaquín de Ramos
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