05 Oct Decalogue of rules on franchise agreement

Within the comercial cooperation relationship, we find the very common of agency or distribution, already treated in other post of our blog, but also with the contracts of franchise. Being one of the most common forms of business development or a business exploitation, the first thing thatsuprise us is that there is no an extensive and specific regulation in Spain that could serve both franchisees and regulatory framework franchisors .  In this entry we want to give some advice about the advantages, risks or inconveniences when signing a franchise agreement.

 1. Registry of franchisors

The Retail Commerce Law (LOCM hereafter) establishes the obligation for the franchisor to get registered in a specific Register under the Ministry of Economy and Competitiveness. In the same must be included the business object of the contract so that the potential franchisee can obtain all the relevant information. Undoubtedly the registration is done as a form of guarantee and control of the franchisors. Checking the franchisor’s registration is a key step. In a time there are many hypothetical successful franchise networks that are not such, starting with the first step is crucial in order to discover a possible deception.

2. Previous information by the franchisor.

It is also important that in the first approaches between the parties, the obligations are of the franchisor – until the franchisee concretes the payment of the entrance fee – It is normal that at first the franchisee sees a project as attractive, he is the commercial target of the franchisor, so it is logical that at first everything  sounds good. That is why we must take advantage of these moments to demand the most detailed information about the business plan, feasibility, history, number of franchises of the network, and examine it with the necessary time. A franchisor who apprehends us will not interest us, and a business model that is not consistent or that has just been born and it’s not consolidated should alert us. This pre-contractual information is imperative for the franchisor.  3.      Pre-contract of franchise. If further steps are taken, it is advisable to prepare a pre-contract, which may be entitled “agreement of intentions” or similar, where some general lines are collected of what will be the subsequent definitive agreement.

3. Franchise precontract.

Franchise pre-contract. If you continue to take steps forward, it is advisable to draft a pre-contract, which can be titled “agreement of intent” or similar, which includes some general lines of what will be the subsequent final contract.

 4. Basic aspects of the relationship.

 As notes that characterize the relationship we can point out that for a franchise there must be:

– Assignment of immaterial rights: logos, trademarks … a series of rights that have an economic value, recognized in the market.

-Transfer of know-how: the franchisor must also provide the way to implement those rights so that they become a profitable business. And communicate it to the franchisor.

-Continuous information: this is the most important, which is usually less taken into account before entering the network and by which the franchises usually fail. The franchisor’s headquarters must provide continued assistance, in all aspects of the business to the franchisee. Check before signing the periodicity, and what will be expressed this attention is of interest of the franchisee.

5. The franchisee is the weakest part of the relationship.

 Franchisees adhere to a franchisor’s system. Such adhesion does not imply a contractual imbalance that can be appreciated by the courts as such if the relationship ends badly and the courts have to settle some conflict, but in practice it is true that this imbalance can be observed with the mere detail of the contract, in which is possible that for the franchisee all are obligations and for the franchisor rights. This duality in the relationship as we say, does not imply that jurisprudence values ​​it as such. In general, it is the established principle that both parties are businessmen or professionals acting as such, so we must discard the idea of ​​acting based on a situation of inequality.

6. Unfair terms.

 In relation to the above, we can not subsequently claim abusiveness or imposition of a clause based on an imbalance between parties, or claiming to be the weakest part, but one must be aware that there may be some null clauses because they are contrary to mandatory rules. For example, those that impose exorbitant obligations in terms of results, volume of operations, eternal temporal limitations, and in general all those from which it is clear that there is no reciprocity, that is, that leave the contract in the hands of one of the parties.

7. Beware of non-compete clauses. Post-contractual non-competition clauses can prevent us from develop the same activity on our own at the end of the relationship. These clauses are valid, but not in any temporal lapse. We must ensure that they are not very durable, knowing that law and jurisprudence in the labor field allows them with a maximum of 2 years.

8. Disengaging from a franchise network is not easy.

 At this point is essential to respect the contract. When we want to break with the network, disengagement can not be done by breaching the contract, closing the premises, or failing to develop the business, because that leads to legal proceedings for breach of contract. That is why we have to analyze and negotiate previously departure times, or if it is not possible and when the situation can not be negotiated, we can analyze whether the franchisor rigorously fulfills each and every one of its obligations. The reduction of expectations is usually one of the major triggers of the ruptures, so there has to be a relationship between the previous information and the real plasma of the business. Misleading information in this case could help us to disassociate ourselves.

9.      Keep the business. Occasionally you can keep the business disconnected from the franchise network. For that, it is necessary to comply with the established in the previous point. A break within the deadlines will involve our leaving the network. But we will have to assure ourselves of subsequent claims, so  all types of labels, brands and any external and operative signs that links us with the franchisor must be eliminated. Keep us strong evidence will be life insurance in these cases.

10.    Let yourself be advised.

 In Navarro Llima Abogados S.L. as a specialized office in commercial matters and in relations of agency, or distribution, we can advise you in the relationship with your franchisor. Feel free to contact us.

Héctor González

Lawyer