A franchise is basically a trade mark licence, with the trade mark owner retaining control over how the franchisee’s business is run, giving assistance to the franchisee, and taking payments from the franchisee. To the outside world, the franchisee is the franchisor. Therefore, it is vital to the franchisor that he does have significant control over the franchisee.

Alternatives to franchise agreements include distribution agreements and licensing agreements, both of which have their own advantages and disadvantages which should be considered before a franchise agreement is entered into.

A business which does want to franchise should have a proven, successful business. The franchisor will be offering a proven business to franchisees. Ideally, just one franchise should be offered to start with, to see whether franchising will work for the business. An operations manual, setting out how the franchisee should run its business, will be developed, via trial and error.

As regards legal regulation of franchising in the UK, there is very little. Pyramid selling must be avoided. Pyramid selling, in this context, is offering incentives to franchisees to find sub-franchisees, who in turn are encouraged to find sub-franchisees. Apart from that, provided the franchise scheme is a single tier scheme under which all UK franchisees operate at the same level, there is unlikely to be much regulation of the scheme. If franchisees operate at different levels, then, unless all franchisees are VAT registered, the scheme is likely to be a ‘trading scheme’ and subject to advertising restrictions and cooling off periods for new franchisees. Of course, any franchise agreement will be subject to competition law, which bans anti-competitive behaviour such as price fixing, market sharing, or abuse of a dominant position; therefore, legal advice on the agreement should always be sought.

Franchisees are usually small operations which are new to business. They may struggle to get a lease of premises and need the franchisor’s help in this regard. The franchise agreement will set out terms on which the franchisee may occupy premises obtained by the franchisor, and particularly will say that the franchisee must leave the premises if the franchise agreement is terminated.

As regards marketing, the franchise agreement normally says that the franchisor will undertake most, if not all, of the marketing, and charge the franchisee a fee for doing so on its behalf.

The first step for franchisors should always be to draft a franchising business plan, which sets out the reasons why franchising will work for the business concerned. Thereafter, the franchise agreement may be drafted, which will set out, amongst other things, the initial duration of the franchise, the initial fee, management fee and the advertising fee, initial training requirements, the insurance the franchisee is obliged to obtain, the requirement (usually) for the franchisee to become VAT registered, and the circumstances in which the franchise agreement may be terminated.

Posted: April 25th, 2008 under Business Advisory Services.
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