Buying a franchise: the legal essentials every franchisee should understand
A conversation with Katie Willems, Legal Director at Higgs LLP
Investing in a franchise is an exciting step, but it also involves entering into a complex legal relationship that can shape your business for years to come. Speaking at The National Franchise Exhibition, Katie Willems, Legal Director at Higgs LLP, shared her insights into the legal considerations prospective franchisees should be aware of before signing on the dotted line.
From understanding franchise agreements to knowing when to seek professional advice, Katie highlighted the areas that deserve careful attention.
Different routes, different documents
Before reviewing any paperwork, it is important to understand how you are acquiring the franchise.
There is a significant difference between investing in a brand-new franchise and purchasing an existing franchise business from a current franchisee, often referred to as a franchise resale. While both routes involve a franchise agreement, the supporting documentation can vary considerably.
The franchise agreement remains the cornerstone document in either scenario, setting out the legal relationship between franchisor and franchisee, along with each party’s rights and responsibilities.
However, when purchasing an existing franchise, prospective buyers should also expect to review documents such as sale and purchase agreements, due diligence information and, where applicable, property leases. Depending on the franchise system, there may also be additional agreements covering areas such as supply arrangements or trademark licensing.
Why franchise agreements are different
Unlike many commercial contracts, franchise agreements are rarely negotiated on a clause-by-clause basis.
Most franchisors operate a standardised agreement across their entire network to ensure consistency and fairness between franchisees. This approach helps maintain operational standards and simplifies the management of large franchise networks.
Franchise agreements are also unique because they govern a much closer relationship than a typical business contract. Franchisees are not simply purchasing products or services; they are being granted the right to operate under an established brand and business system.
As a result, the agreement must cover a wide range of operational, branding and compliance requirements to ensure customers receive a consistent experience across the network.
Another distinguishing feature is the length of the relationship. While many commercial agreements are relatively short-term, franchise agreements often run for five years or more, with some extending significantly longer. This means they must anticipate future circumstances and provide a framework for handling a wide variety of situations over time.
Pay close attention to these clauses
While every section of a franchise agreement deserves consideration, Katie identified two areas that franchisees should examine particularly carefully.
1. Personal guarantee.
Where a franchise is operated through a limited company, franchisors commonly require the business owner to provide a personal guarantee. This gives the franchisor additional protection if the company is unable to meet its obligations.
Although personal guarantees are standard practice across many franchise systems, franchisees should fully understand the implications. In certain circumstances, liabilities may extend beyond the business itself and potentially affect personal assets.
2. Restrictive covenants.
These clauses typically prevent franchisees from competing with the business, soliciting staff or approaching customers for a specified period after leaving the network. Their purpose is to protect the goodwill and intellectual property of the franchise system.
However, franchisees should consider how these restrictions could affect their future plans. While many enter franchising with a long-term commitment in mind, circumstances can change. Understanding the scope and duration of any restrictions before signing can help avoid surprises later.
The value of specialist legal advice
Katie strongly recommends involving a solicitor early in the process.
For most people, buying a franchise represents a substantial financial and personal commitment. It is therefore important to approach the decision with the same level of due diligence as any other major investment.
Once a prospective franchisee has identified a suitable brand and received a draft franchise agreement, that is typically the ideal time to seek legal advice. A specialist franchise solicitor can explain key provisions, identify potential risks and ensure the franchisee fully understands the commitments they are making.
Importantly, not all solicitors have franchise expertise. Katie advises seeking a professional with specific experience in the sector. The British Franchise Association (BFA) directory can be a useful starting point, as it includes accredited advisors with proven knowledge of franchising.
In summary
A franchise agreement is far more than a legal formality. It is the document that underpins the entire relationship between franchisor and franchisee and will influence how the business operates for years to come.
Taking the time to understand the key documents, reviewing important clauses carefully and seeking specialist legal advice can help franchisees enter their new venture with confidence. While legal considerations may not be the most exciting part of the franchise journey, getting them right at the outset can provide valuable protection and peace of mind for the future.
