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Franchising

Our corporate franchising solicitors provide a comprehensive service for franchises to fulfil their legal obligations.

This guide provides a detailed and comprehensive guide on franchising in the UK, aimed at educating prospective franchisees, franchisors, and legal professionals on the legal aspects, processes, and best practices involved in franchising. 

The guide will highlight the importance of understanding legal obligations and the benefits of seeking professional legal assistance. 

We’ve written this for:

• Entrepreneurs consider franchising

• Current franchisees and franchisors

Our specialist franchising solicitors use their expertise to set you up for success by providing a solid legal base to all franchisors and franchisees. We can assist in all areas of intellectual property, employment law and competition law. Lawhive is a trusted and affordable legal service provider in the franchising sector. Get in touch with us for guidance with a franchise agreement.

What is franchising?

Franchising is a popular business strategy where a franchisor allows another business, the franchisee, to distribute its products and services. The franchisor has an established brand, trademark and business model which they license to the franchisee who pays a royalty fee and often an initial fee to do business under their name, or by using their trademarks. 

There are different extents to franchising agreements. Some are all-encompassing and give the franchisee access to know-how, products, services, supply chain, marketing, rights, etc. While others limit what the franchisee can benefit from.

There are different types of franchising:

• Business format – this form of franchising is the most common. In business format franchising, the franchisor provides the franchisee with its entire business system including its trademark, brand name and products. Franchisees get support in all areas from choosing a site, brand guidelines, training, development, operating manuals, quality control, marketing strategy and business support

• Product distribution – also known as traditional franchising, product distribution franchising is a type of franchising where the franchisor grants the franchisee the right to distribute its products under the franchisor’s trademark and brand standards. However, it differs from business format franchising as the franchisee is responsible for the rest of their own business operations

• Management franchising – unlike business format and product distribution franchising, which are owner-operated, management franchisers utilise a team of professionals to operate a franchise on a day-to-day basis, while they manage the team. Some individuals have other business interests and may have multiple franchises. Owners of management franchises run them on a strategic rather than operational level

Advantages and disadvantages of franchising types:

Business format:

Product distribution:

Management franchising: 

Franchising and UK law

When managing a franchise under UK law there are some legal issues to be aware of. 

A franchise agreement is a legal document that sets out the terms and conditions for a franchisor-franchisee business relationship.

You may need legal support when drafting a franchise agreement to ensure you have guidance on creating an agreement that suits you. We can advise you on the necessary clauses to include to protect you and how to implement them. 

Whether you’re an experienced franchise operator or are taking your first steps, it’s essential to have a carefully drafted franchise agreement. 

In 2022, UK and EU competition laws were revamped for all types of distribution agreements including franchising. 

The key elements of competition law include retail price maintenance, restrictions on passive sales outside a contractual territory, bans on online selling, exclusive supply and non-compete obligations. 

Exemptions to competition laws include intercompany agreements, integrated franchises and non-economic activities. 

Franchisors must follow EU competition law which means the following are illegal:

• Vertical and horizontal price fixing

• Sharing markets

• Passive sales

• Online sales

Franchisors can be protected through intellectual property law by registering trademarks to safeguard their brand name, logo, products and services. Infringing on a franchisor’s intellectual property can lead to legal action against franchisees.

Competition law relates to the franchise agreements in the UK, regulated by the Competition and Markets Authority and EU member states, regulated by the European Commission. 

The British Franchise Association also regulates franchising in the UK, promoting ethical franchising. Its Code of Ethics are not legally binding, but its members must follow them. They provide the benchmark for best practice in relation to pre-contractual disclosure, advertising recruitment, online selling, fairness in the franchisor-franchisee relationship and dispute resolution. 

Franchise law sets various compliance requirements for franchisors and franchisees. Penalties can be given for breaches, including cancelling a franchise agreement, or fines as a percentage of global turnover. Consulting with specialist franchise lawyers can help you stay on the right side of these laws and avoid penalties.

Franchise agreements: key clauses and considerations

There are some essential clauses to add to any franchise agreement. Consider whether the following are addressed sufficiently before signing a franchise agreement:

• Fee structure – depends on the type of franchise agreement made. In business format franchising, the franchisee pays a fee to the franchisor for the use of their brand and business system. In product distribution franchising, franchisees pay a fee for the product or service, but not the use of the brand name or business system

• Territory and exclusivity – the franchise territory needs to be fully defined. Some agreements have territorial restrictions. In business format franchising the franchisee is given exclusive territorial rights, this means they are the only franchisee that can operate in a specific geographical area. In product distribution franchising, franchisees often are not given exclusive territorial rights because franchisors choose to sell their products to multiple franchisees in one area

• Operational obligations – in business format franchising the franchisee is provided with an operating manual. This sets out the franchisor’s business model and the expected standards and guidelines a franchisee must follow

• Intellectual property – set out the intellectual property being used. What are the penalties for breaching it as a franchisee? As a franchisor is IP established and are protections in place?

• Termination and renewal – agreements should include the length of the franchise arrangement, whether it can be renewed and the conditions under which renewal is possible and the grounds for termination

Dispute resolution – a mechanism for dispute resolution such as mediation should be agreed upon, so both sides know what to do to resolve issues when potential disputes arise

The franchisee’s journey 

For a franchisee, the process of signing a franchise agreement can be a long road. 

There will be a period after you have decided to explore franchising as a business strategy when you debate which sector and specific business you wish to work with. 

What to look for in a franchise:

• Record of successful sales

• Market opportunities

• Competitive landscape for the franchise

• Level of support

• Fee structure 

• Company culture

• Similar values

• Happy franchisees

When you select the business, you’re interested in forming a relationship with, it is important to carry out due diligence. There are several important checks you should make when researching whether the franchisor is a suitable business partner. You should read all the materials the franchisor shares with you including an operational manual, speak to franchisees within the franchisor’s network and conduct your own independent market research. 

Additionally, it is important to seek the guidance of independent financial and legal experts to get their advice on whether the relationship is feasible. 

When you have carried out your due diligence and you’re happy to go ahead, you will need to secure the financing to pay initial costs. Some franchises can be purchased with only a few thousand pounds as initial costs. However, if you need to pay a higher fee for a more suitable business you will need to secure more funding.

There are financing options available. You’ll need to prepare a business plan if you want to borrow money. Speak with an accountant to review your business plan and ensure your credit history is as high as it can be before applying for finance. 

What are a franchisor’s responsibilities?

On the other hand, if you run an established business and are evaluating allowing other businesses to leverage your model, there are plenty of considerations to make.

A franchisor in business format franchising needs to develop a franchise model. This will control how the franchisee runs their business while protecting their brand and ensuring consistency and quality across locations. 

When it comes to legal issues in franchise expansion, franchisors must ensure their brand, logo and IP is protected to look after their interests and their franchisor's interests. Failure to do so can lead to unlicenced imitators diluting their brand and the franchisee’s market share.

Franchisee support, including the training and development of staff is the franchisor’s main responsibility. Franchisors should also provide marketing and operational support. This ensures that the franchisee has everything they need to succeed, which is in both parties’ interests.

Franchise operations and compliance

Franchise operations need careful day-to-day management. Managing franchisee relationships is a key part of running a successful franchise operation.

Franchisors can successfully manage franchisees by:

• Openly communicating with franchisees

• Setting clear and enforceable expectations from day one

• Offering support and guidance

• Providing mechanisms for conflict resolution

Maintaining brand standards is a crucial element of running a successful franchise. As a franchisor giving up your brand image and IP to another company to use is a leap of faith, so you’ll want to be assured your reputation is in good hands. 

There are steps you can take to maintain brand standards such as carefully vetting any partners you work with. Drafting a comprehensive franchise agreement which includes clauses protecting brand misuse and standards can offer restitution if your brand is damaged.

There are important laws to comply with too. You’ll need to consider health and safety law, employment law, and consumer protection. Pay attention to data protection laws and GDPR compliance. 

What is the difference between a franchise and a licence?

Franchises and licensing arrangements both allow businesses to use another businesses’ registered trademarks. However, key differences lay in the closeness of the relationship between the franchisor and the franchisee. License agreements are limited in scope and typically relate to one activity. 

Additionally, there is a greater deal of control in a franchisor-franchisee relationship than in a licensor-licensee relationship.

Licensing gives licensors little control, in franchising the deal of control is much higher.

Franchising has a higher revenue potential than licensing. 

Licensing has lower investment costs than franchising.

Can I sell my franchise?

You can sell a franchise. To proceed with a sale, review your franchise agreement to understand any clauses that relate to selling. 

You’ll then need to obtain approval from the franchisor, before getting your business valued and putting it on the market.

What are my rights if a franchise agreement is terminated?

This will depend on your franchise agreement, so review that carefully. Typically, the franchisee will be required to notify the franchisor if they wish to terminate the agreement and follow an established notice period.

Usually, the franchisee will need to return any property they are using to the franchisor and pay any fees or royalties owed.

After the termination franchisees need to stick to non-compete obligations laid out in the franchise agreement. 

Legal services for franchising 

Franchising can be a lucrative business strategy for franchisors and franchisees. It’s crucial to get a franchising agreement right as they establish both side's rights and obligations, provide protection against breach of contract and offer routes of termination. 

Before entering into a franchise agreement, it’s important to seek legal advice so that the agreement meets your needs.

If you would like to discuss your circumstances contact Lawhive today for expert assistance.