The term “franchising” is used to describe many different forms of business relationships. In its most familiar sense, the term “franchise” has arisen from the development of what is called “business format franchising”. This is the granting of a licence by one person (the Franchisor) to another (the Franchisee), which entitles the Franchisee to trade as their own businesses under the brand of the Franchisor, following a proven business model. The Franchisee also receives a package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a pre-determined basis. A Franchise Agreement will normally have a pre-determined agreement length, with renewal options.
A franchise in this sense will usually entitle the Franchisor to exercise continuing quality control over the Franchisee with the Franchisee periodically making payments to the Franchisor.
The British Franchising Association represents Franchisors and their latest annual survey estimates that there are 930 franchise systems in operation in the UK.
As a business you may wish to set up a franchise operation if you have a successful existing business which you wish to expand.
You should aim to form a business plan setting out the reasons for franchising, confirmation that the proposed products or services are susceptible to franchising and a breakdown of the proposed management structure and an explanation as to its appropriateness for franchising. One of the most important aspects of this initial pilot phase will be the development of an operations manual which will regulate the terms on which a Franchisee operates the franchise business. The operations manual will set out the day to day operation instructions to the Franchisee.
Many Franchisees operate from retail premises. Franchisees are often small entities with no track record and a Franchisor may have to take the Head Lease for premises and grant a Sub Lease to its Franchisees in order to satisfy the landlord’s requirements. Property issues of this sort need to be ironed out at an early stage of the franchising process.
The Franchise Agreement will normally contain provisions authorising the use of a brand name and other Intellectual Property (including the operations manual) and careful advice needs to be taken to ensure that your interests are properly protected and Intellectual Property safeguarded.
We are often consulted by prospective Franchisees who wish to understand the obligations which will be imposed upon them in any given Franchise Agreement. Taking a franchise often represents a good way of becoming self-employed but giving the new business instant traction. However, many new Franchisees do not have general business or management skills and although franchising will enable them to take advantage of the Franchisor’s name and reputation, they may well require advice in connection with any relevant finance, the risks of business failure and the other obligations set out in the agreement.
Franchising is now regulated by the Trading Schemes Act and also extensively regulated by UK Competition Law. We can advise both Franchisors and Franchisees in connection with these areas as well as those other issues which we have already referred to above.