The franchise phenomenon
When considering the word ‘franchise’ you might picture in your mind the array of casual dining and fast-food restaurants on your local high street but the franchising model extends well beyond the food and drink sector. NatWest estimates the UK is home to around 44,000 franchise business units generating almost £15bn in revenue annually.
Irwin Mitchell’s franchise team recently attended the International Franchise Show in London’s ExCel in April. It was clear from the 250+ exhibitors and the estimated 11,000 visitors that the franchising system has been adopted by businesses of every size, in every sector, in countries around the world and is proving remarkably resilient.
So why has it been so successful and what are the benefits and legal pitfalls of operating or investing in a franchise business?
In simple terms, investing in a franchise is potentially a low-risk way of buying part of an already successful brand. From coffee shops and burger chains to gyms, swimming schools performing arts education, there is plenty of variety, the brand recognition is likely to be high and the well-managed groups will provide training and advice to get started. When a business is growing and doing well, it’s easy to see why people want a part of the success. It’s also relatively easy to access with finance support available and the existing supply chains and operating models proven to work.
It's not without risk however. Businesses looking to expand through franchise should take particular care with their franchise agreement. This forms the foundation of the whole operation and is the contract which sets the terms between franchisee and franchisor: all of the rights and obligations, and for how long.
The franchise agreement will set out financial terms too. Everything from who pays what fees and how frequently through to how to maintain culture, brand and quality is set out in the franchise agreement. Get this wrong and the business can fall apart quite quickly and at great financial cost.
Other aspects to discuss with your legal advisers when considering franchising your business should include:
- Intellectual property and trademarks
- Ownership of property and physical assets
- Advertising and competition law
- Employment and training requirements which are so crucial in helping maintain the integrity of your business.
Poor wording in the franchise agreement could also mean the original concept, carefully created by the franchisor, being diluted, copied or replicated elsewhere.
Franchise agreements are complex legal contracts. For many people running a franchise is their first experience of managing people and leading a business. Allegations of breach of contract and disputes over fees are commonplace, particularly when a franchisee looks to step back from the business. For this reason, it is always worth taking time and consulting specialist commercial lawyers who can walk you through the steps to getting it right.
If you are considering developing or investing in a franchise business the Irwin Mitchell franchise team would be happy to help. Please get in touch with Catherine Palmer.
