Obligations of the franchisee and the franchisor in the franchise network

Verified 20 July 2023 - Directorate for Legal and Administrative Information (Prime Minister)

Franchising is a contract whereby a company (franchisor) grants independent traders (franchisees) the right to exploit its brand and successful business methods, in exchange for financial consideration. The franchisee and franchisor have specific obligations to be respected.

Please note

Before you join a franchise network, the franchisee has to ask himself certain questions.

Obligations of the franchisee

The franchisee has several obligations towards his franchisor. The franchisee's obligations may vary from one franchise network to another, so it is essential to read the franchise agreement carefully before committing.

To join the franchise network, the franchisee is frequently required to pay a lump sum called “ right of entry ”.

This right of entry constitutes the financial contribution the transfer of know-how, start-up assistance and initial training provided by the franchisor. It may be required at the conclusion of the initial contract but not when renewed.

Please note

From one franchise network to another, the amount of the entry fee varies considerably depending on the sector of activity, know-how or reputation of the franchise, ranging from €5,000 to more than €50,000.

In addition, the franchisee must pay a recurrent fee to the franchisor. This is counterbalanced by the availability of distinctive signs (brand and sign), territorial exclusivity, continuous assistance and advertising campaigns carried out by the franchisor.

The amount of the fee and its calculation procedures are freely determined in the franchise agreement. The parties may opt for a fee fixed or proportional the franchisee's turnover. It may or may not be capped.

When a franchisee joins a franchise network, it is required to comply with network policies established by the franchisor.

These policies are set out in the franchise agreement and may cover a wide range of aspects:

  • Quality standards of products or services : guidelines on ingredients, manufacturing processes, hygiene standards, etc.
  • Operational procedures : protocols on inventory management, human resources management, opening hours, customer service methods, etc.
  • Point of sale layout and presentation standards : specific standards for point of sale layout, interior design, visual display, signage and product presentation, etc.
  • Marketing and advertising strategies : guidelines on the communication channels to be used, the messages to be transmitted, the promotions to be offered, etc.
  • Pricing policies : Guidelines on the pricing of products or services to maintain price consistency across the network
  • Training Requirements : mandatory training programs for franchisees and their staff on products, operational procedures, customer service, sales, etc.
  • Monitoring and reporting : regular reporting by the franchisee on its performance and sales to enable the franchisor to monitor its progress and provide adequate support.

Adherence to these policies ensures that consistency of brand identity and ensure a consistent experience for customers, no matter which franchisee they visit.

In the event of non-compliance with network policies, the franchisor can implement appropriate measures: audits, warnings, financial penalties or even the termination of the franchise contract.

Please note

Nevertheless, the franchisee must retain a certain degree of margin of maneuver in the exploitation of his franchise, inherent to his status as an independent trader.

By integrating the franchise network, the franchisee gains access to various confidential information. This may include details about products, manufacturing methods, suppliers and customer databases, marketing techniques, sales strategies and other trade secrets.

In order to maintain the confidentiality of this information, the franchisor shall include in the franchise agreement a confidentiality clause (or non-disclosure clause). This clause introduces a duty of confidentiality at the expense of the franchisee.

Thus, the franchisee commits for himself and his employeesnot to disclose to third parties any confidential information and instructions which may have been given to him.

Please note

The duty of confidentiality may also be formalized in a separate confidentiality agreement. producing its effects from the talks (negotiations) and even after cessation contractual relations.

In the event of a breach of the confidentiality clause, the franchisee shall be liable to a immediate termination without notice the franchise agreement by the franchisor.

On the other hand, the franchisee is entitled to set up or participate in an association defending the interests of franchisees (giving rise to the disclosure of certain information) in order to to defend its own interests without this leading to the termination of the franchise agreement.

The exclusive supply clause is common in franchising. By this clause, the franchisee undertakes:

  • Or to source exclusively from the franchisor's brand products
  • Or to source exclusively from suppliers referenced by the franchisor, because they meet specific criteria of quality, reliability and consistency with franchise standards.

In other words, the franchisee cannot source from unapproved suppliers or alternative sources without the prior agreement of the franchisor.

To be valid, the exclusive supply clause must be legitimate and proportionate the aim pursued, that is to say to maintain a constant level of quality and guarantee consistency of the products or services offered by the various franchises.

The franchisor must be able to demonstrate how the clause is necessary to preserve the identity and reputation of the network.

Please note

The exclusivity clause may not exceed a maximum period of 10 years.

The exclusive supply obligation may be relaxed in certain situations. For example, the franchisee may be permitted to use local suppliers for specific products that are not available through approved procurement channels.

However, these exceptions usually require prior approval from the franchisor.

The franchisee has a non-compete obligation towards the network head (the franchisor). It arises from the franchisee's general duty of loyalty.

The non-compete obligation shall apply during the term of the contract and on a defined geographical area (a region, a city, a specific location or even the French territory).

This obligation is intended to protect the interests of the franchisor in preventing the franchisee from engaging in competitive activity which could be detrimental to the operation of the franchise.

Example :

This may include prohibiting the operation of a similar company, the sale of similar products or services, or participation in a competing company.

In addition, the franchise agreement may include a post-contractual non-compete clause. It is also intended to prevent the franchisee from engaging in a competitive activity in a given area, except that it applies on expiry of the contract, i.e. after the end of the contractual relationship.

To be valid, a post-contractual non-compete clause must respect the following 4 conditions :

  • The obligation concerns goods or services in competition with the goods or services of the franchise network
  • The obligation is limited to the premises and land from which the franchisee has operated during the term of the contract
  • The obligation is indispensable for the protection of the know-how transferred
  • The duration of the obligation is limited to 1 year from the expiry of the contract.

Please note

In certain cases, the post-contractual non-compete clause may provide for a financial compensation for the franchisee. This can be in the form of a lump sum payment or periodic compensation to compensate for potential losses incurred as a result of this restriction.

Obligations of the franchisor

The franchisor, also known as network head ', a several obligations towards its franchisees. The franchisor's obligations may vary from one franchise network to another, so it is essential to read the franchise agreement carefully before committing.

At least 20 days before signature of the franchise agreement, the franchisor must provide the franchisee with a pre-contractual information document (PID) to enable it to make an informed decision, that is to say, an informed decision.

The pre-contractual information document shall contain following information :

  • Identity of the franchisor : name, address of registered office, legal form, registered capital, Siren number (unique company identification number) and registration number at SCR: titleContentand the contact details of its establishments
  • Identity of network managers : Name, position, professional experience and educational level
  • Financial situation of the franchisor : balance sheets and income statements for the last 2 financial years, as well as information on financial guarantees
  • Detailed description of the franchise concept : nature of the activity, characteristics of the products or services offered, characteristics of the market, target clientele, etc.
  • Terms and Conditions of the Franchise Agreement : duration of the contract, conditions for renewal, grounds for termination, conditions for assignment or transmission of the contract, etc.
  • Rights and obligations of the parties, in particular the franchisor's obligations with regard to assistance, training, operational support, the provision of products or services, etc.
  • Investments needed to open and operate a franchise: initial costs, periodic fees, advertising costs, training costs, etc.
  • Territories and exclusivity : territorial restrictions, exclusive zones, priority rights, etc.
  • Ongoing litigation involving the franchisor : intellectual property disputes, disputes with franchisees, insolvency proceedings, etc.
  • Franchisees of the network : number, addresses, possible assignment or termination of franchise agreements, etc.

To ensure the honesty of the DIP, the franchisee can conduct his own market research and interview already settled franchisees on the quality of the franchise network. It is also recommended that the franchisee consult a specialist lawyer the duty of candor to check the conformity of the DIP with the legal requirements in force.

Warning  

The franchisor who does not communicate the pre-contractual information document shall be liable to a fine of €7,500. Failure to do so may also result in nullity of the contract of frankness.

On the other hand, there is no obligation on the franchisor to transmit estimated operating accounts to the franchisee. They have to be prepared by the public accountant himself, with the assistance of the public accountant. The franchisor therefore does not incur any liability or nullity of the contract if the franchisee's forecast accounts are too optimistic.

However, if the franchisor takes the initiative to provide forecast accounts, these must be sincere and serious.

The franchisor must to pass on know-how to his franchisee. It is a set of practical, non-patented information, resulting from the franchisor's experience and having enabled its commercial success.

Specifically, the franchisor must provide the franchisee with practical and concrete knowledge of his methods to enable him to acquire a competitive advantage.

Example :

In the field of food distribution, the know-how may lie in allowing the franchisee to market the products selected by the franchisor, specially packaged and enjoying unquestionable reputation, as well as appropriate advice for their sale.

The know-how must be both:

  • Secret : know-how should not be known or easily accessible
  • Substantive : the know-how must be significant and useful to the franchisee, to enable him to sell goods or services
  • Identified : the know-how must be described in a sufficiently complete manner to enable it to be verified whether it satisfies the 2 preceding conditions.

Warning  

The conclusion of a franchise agreement without the transmission of secret, substantial and identified know-how is not valid.

Moreover, know-how is not destined to remain frozen. The competitive advantage enjoyed by the franchisee is bound to erode over time as competitors catch up. The franchisor must therefore anticipate and evolve to maintaining the attractiveness of the franchise network.

However, the evolution of know-how should not lead to network instability. For example, the franchisor cannot require franchisees to constantly make costly investments in order to adapt to the requirements of constantly changing know-how.

The franchisor must make available to the franchisee the external signs of membership of the network (brand, brand, brand name).

Thus, the franchisor must ensure that his rights to the distinctive signs are maintained, in particular by renewing his trade marks. They may also be required to promote the brand through national advertising campaigns, the creation of promotional materials and the development of digital marketing strategies.

Please note

Local advertising is usually left at the initiative of the franchisee, in compliance with the recommendations and under the supervision of the franchisor.

The transfer of the franchisor's property rights must be ascertained in writing by means of a operating license agreement included in the franchise agreement. The license is qualified asexclusive or non-exclusive whether franchisees enjoy territorial exclusivity or not.

In case ofaction in forgery against a competitor, the action must in principle be brought by the franchisor. However, if the franchisor does not exercise his right and there is no provision to prevent this in the franchise agreement, the franchisee who has the exclusive right of exploitation may bring the infringement action himself.

The franchisor has an obligation to provide assistance to the franchisee for the entire duration of the franchise agreement.

Start-up assistance

Franchisor support may begin even before the conclusion of the franchise agreement, where the franchisee is prospecting for find the location of his future establishment. In many cases, the franchisor will have zoned using specialized tools and will be able to advise the franchisee on the most appropriate location.

Generally, the choice of location and premises is the result of a joint decision franchisee and franchisor. This choice can also be made by unilateral decision the franchisor, where the franchisor owns the walls or owns the business that the franchisor leases to the franchisee.

The fitting-out and arrangement of the point of sale may also be carried out in accordance with the recommendations of the franchisor, or even under his control.

Please note

The franchisor may also provide the franchisee with a list of equipment, material and stock required for the start-up of the operation, as well as various promotional and advertising materials.

In-Service Support

The obligation to provide assistance is then extended throughout the entire holding frankness. It will materialize by network animation (regular organization of seminars, training, annual conventions for the exchange of information). In this sense, the franchisor may make available to franchisees a secure platform enabling continuous and dematerialized exchange between all members of the network.

Assistance also involves a individualized monitoring franchisees by organizing visits to their establishment and carrying out audits, most often through the practice of mystery shoppers ”. In this context, the assistance is also a good way for the franchisor to ensure that its franchisees comply with their own obligations.

As such, the franchise agreement may provide for sanctions against franchisees in the event of non-compliance identified in the course of such monitoring.

Please note

The franchisor may also provide its franchisees with a legal and technical assistance, to help them solve problems related to the exploitation of the franchise.

Assistance in case of difficulties

When the franchisee meets with financial difficulties, the obligation to provide assistance finally requires a positive attitude on the part of the franchisor intended to to promote recovery franchised company. For example, the franchisor may have to adjust or renegotiate the terms of the franchise agreement.

A franchisor who refuses to help his franchisee break the economic deadlock could see his liability incurred.

Moreover, the obligation to provide assistance prohibits the franchisor from obstructing closure or conversion the company of his franchisee. For example, where the products distributed are those of the franchisor, the franchise agreement may include a clawback clause.

The franchise agreement usually includes a territorial exclusivity clause. This guarantees the franchisee a specific geographical territory in which he will be the only one to exploit the brand or franchise concept.

The idea is to allow the franchisee to benefit from a catchment area defined, in which he can develop his business without direct competition from other franchisees of the same name. This gives her some security and an opportunity to build a loyal customer base in her area.

Please note

In the absence of a clause, there is nothing to prevent the franchisor from establishing a new point of sale in the same catchment area.

Where a territorial exclusivity is granted to a franchisee, the other franchisees of the brand shall not not the right to prospect for customers in the protected territory sending unsolicited emails, running targeted ads or visiting.

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