Franchise agreement in Israel: what the franchisee buys, and what the franchisor keeps
Israel has no dedicated franchise statute, so the agreement itself is almost the entire law governing the parties. It is a long document, drafted almost always by the franchisor, and whatever it omits is decided afterwards. This page goes through the components that determine what is actually being bought.
“The territory clause and the renewal clause are the two clauses that are truly read only in the fifth year.”
Adv. Erez Sapir
What a franchise is, and what sets it apart
In a franchise, the owner of a brand and an operating system grants another party the right to run a business under that brand and according to that system, in return for payment. The franchisee is an independent business owner in every respect: they carry the investment, the staff and the risk.
What distinguishes a franchise from other commercial arrangements is the degree of control. The franchisor does not merely supply a product. It dictates the look, the menu or product line, the suppliers, the recommended prices, service procedures and sometimes opening hours.
The distinction from agency is sharp: an agent acts on behalf of the supplier and is paid commission, while a franchisee runs their own business at their own expense and pays the franchisor. The distinction from distribution is equally sharp: a distributor sells goods, a franchisee operates a whole business model.
No dedicated statute, and what that means
Unlike some other jurisdictions, Israel has no dedicated franchise statute and no statutory pre contract disclosure duty requiring a franchisor to hand over data before signature. The general rules of contract law apply, foremost the duty of good faith in negotiation, alongside consumer protection, competition and intellectual property law as the circumstances require.
Two practical consequences follow. First, the agreement is the law. What is not written in it will not be found in legislation. Second, the burden of investigation sits with the franchisee. There is no standard disclosure document, so what the franchisee does not ask to see, they will not see.
Hence the recommendation that appears on every franchise page ever written, and it is correct: ask for data before signing, in writing, and keep the answers. Presenting inaccurate figures in negotiation is a cause of action, but only if you can show exactly what was presented.
What the franchisee actually buys
A licence to use the brand. Note that this is a licence and not ownership. On termination the right stops, which is covered in the termination section.
The operating system. Procedures, recipes or specifications, management systems and training. This is the core of the value, and also what justifies the restrictions.
Support and training. Initial training, opening support and ongoing assistance. The agreement should define their scope rather than settle for a general undertaking to provide support.
Territory. Covered below.
And what is not bought: a promise of profit. Projections presented in negotiation are not part of the agreement unless written into it, so it is worth asking that the figures presented be attached as a schedule. A franchisor who refuses to attach figures it presented is telling you something.
The money: fees, royalties and advertising
Initial franchise fee. A one off payment for entry into the system. Establish exactly what it covers and whether it is refundable if the deal does not proceed.
Ongoing royalties. Usually a percentage of turnover. The critical point: a percentage of turnover, not of profit. That means the royalty is paid in a loss making month too. Check what is included in the calculation base, for example whether VAT, delivery charges and discounts are deducted.
Advertising levy. A payment into a joint marketing fund. A question worth asking in advance: who decides how the fund is used, and does the franchisee receive an accounting.
Central purchasing. An obligation to buy from designated suppliers. This is a legitimate component that preserves consistency, but check whether the prices are competitive and what happens when they are not.
The initial investment. Fit out, equipment, opening stock, and sometimes mandatory design requirements that raise the cost of the works.
Territory and exclusivity
This is the clause that generates most disputes, and it is almost always drafted in a way that suits the franchisor.
Three questions that must be answered in writing: what exactly is the area, by streets or postcode rather than a general description; is the exclusivity complete, meaning may the franchisor itself open a branch there; and what happens with online sales, which do not respect geographic boundaries.
The third question has become central. A franchisee who bought exclusivity in an area and finds the franchisor selling the same products online with delivery to that area bought less than they thought. Regulating this point, including a share of online turnover in the area, is now a substantial part of the negotiation.
Term, renewal and termination
The term must be long enough to recover the investment. Too short a term leaves the franchisee in a structurally weak position at renewal.
Renewal. Check whether it is automatic or discretionary, and on what conditions. At the franchisor discretion means there is no renewal right.
Termination. Distinguish termination for breach, which should include a cure period, from termination for convenience. An agreement allowing the franchisor to terminate for convenience on short notice is dangerous for a franchisee who has invested.
The day after. Removing signage and branding, the fate of the stock, the fate of the customer list, and non competition. A restriction preventing the franchisee from practising their trade at all may not stand, but one focused in time and place will.
And where the business does not survive, see expedited voluntary liquidation and personal guarantee, since franchisees frequently sign personal guarantees to the landlord and to the franchisor.
What to check before signing
Speak to existing franchisees, and preferably to some who have left. This is the check that produces the real information.
Ask for turnover figures for comparable branches, in writing.
Check the brand: is the trade mark registered, and in whose name.
Check the premises, including their compliance with planning and building law and the business licensing required. This is the failure that defeats openings.
Consider the structure through which the franchise will be held. See choosing a business structure.
Check the guarantees required of you personally.
Legal support
We act for both sides. For a franchisee we go through the agreement and mark the clauses that are negotiable, and there almost always are some, and check the premises and licensing before the commitment. For a franchisor we build a consistent set of agreements that protects the brand and network consistency without creating clauses that will not stand.
To reach us: 02-5953322 in Jerusalem, 03-3030430 in Tel Aviv, WhatsApp 050-4411343.
Frequently asked questions about franchise agreements
Is there a franchise statute in Israel?
What is the difference between a franchise and an agency?
Are royalties calculated on profit or turnover?
What is the most important question in the territory clause?
Can the franchisor terminate whenever it wants?
What is the most important check before signing?
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