Legal advice for franchisors
Becoming a franchisor
Legal advice for franchisors
For a successful business franchising offers an excellent opportunity to expand without incurring the significant levels of capital investment normally associated with organic growth. Through a network of motivated and successful franchisees the franchisor can establish a nationwide or even international business without incurring the kind of expenditure and liability that would normally be associated with such expansion if it were done “in house”.Key areas in which a prospective Franchisor should consider taking legal advice:
• The Franchise Agreement.
• Deposit and Confidentiality Agreement/Intent to Proceed Agreement/Territory Reservation Agreement.
• Trade Marks and Branding.
• Policing the Franchise Network.
• Franchise Network and Corporate Structure.
A critical element of any successful Franchise Network is the Franchise Agreement. This is the agreement which regulates the relationship between a franchisor and each of its individual franchisees. The agreement will closely regulate the manner in which the franchisees operate the business, use the franchisor’s trade marks and other branding, marketing and promotional materials, sets out the fees that the franchisor should receive from each franchisee in return for operating the franchise business and restricts each franchisee’s commercial activities outside the franchise in order to ensure that their efforts are properly focussed.The Franchise Agreement is best drafted by a specialist franchise solicitor with appropriate expertise and experience in the industry. It is a critical document which coupled with the Franchise Manual will enable the franchisor to ensure that each individual franchised business is operated in accordance with the systems and standards the franchisor itself has established in its own business.
The franchisor will be granting each franchisee the right to use the franchisor’s trade marks and other “intellectual property”. It is important for the franchisor to protect such trade marks. This may include registration in the UK, Europe or internationally.
When dealing with prospective franchisees, the franchisor will often need to disclose information concerning the franchise which it may want treated in confidence. Franchisors may also wish to secure that only prospective franchisees who are seriously interested in taking a franchise are given such information. For that reason Deposit and Confidentiality Agreements (sometimes known as “Intent to Proceed” or “Territory Reservation” Agreements) are common. Care needs to be taken in the drafting of such documents in order to ensure that they comply with legal and ethical standards.
The franchisor will also need to consider how it structures its franchise business within its own existing organisation. For example, the franchisor may wish to separate its existing original business from the separate business of franchising that system. It may therefore wish to set up a subsidiary company to carry out the franchising operation. If the franchisor is seeking to expand internationally, the appointment of master or regional franchisees should be considered. Both legal and accounting advice should be sought in relation to these decisions.Once a franchise network is established, the franchisor will need to ensure that each individual franchisee is operating its business in accordance with the franchise agreement and the system developed by the franchisor. It is only by doing so that the franchisor can be satisfied that each individual franchise business is operating in the manner which the franchisor knows to be successful. The franchisor will also wish to ensure that franchisees are properly accounting for their income and expenditure in relation to their business especially if the fees payable to the franchisor related to revenues.
If the franchisee breaches its obligations under the franchise agreement the franchisee will need to consider what action to take. Again it would be sensible to seek advice of a specialist franchising solicitor as to what courses of action are available and which is the most suitable in the circumstances.
