Get the legal framework right

The franchise agreement is the building block for your future commercial and legal relationship with franchisees, so it is important to nail it down correctly

If you already own a successful business, it can be tricky to know where to go next. Do you spend time and money hiring more staff and buying bigger premises, or do you look at another way? From food and fitness to professional services and so much more, franchising can be a great way to expand and develop your offering. But before you rush into recruiting prospective franchisees, there’s a lot of groundwork that needs to be done.

While there is no specific legal framework for franchising in the UK, there are some laws which will apply to franchising your business, including intellectual property and contract laws.

Preparation

Franchise businesses will need to have a solid business plan already in place and a demonstrable track record of success. A potential franchisee is looking to capitalise on the work you have already put in. They don’t want to start from scratch, thereby avoiding the potential headaches that come with getting an entirely new venture off the ground. So consider if you have a structured business with set systems in place and strong branding that will prove attractive to prospective franchisees.

Do your research and find out who your competitors are. It’s likely you will already have sound industry knowledge but if you haven’t looked further afield than your current operation, now is the time to do so. Have a look at other franchises in the relevant field and how they are doing. Is there an opportunity for you to develop your business in this space? What could your business look like in the future? Don’t be afraid to think big. Many franchise operations have taken their formula overseas and experienced huge success in international markets.

Registering your logo as a trademark and registering any other key intellectual property (IP) associated with your business is an important part of your preparation if you have not done this already, as this will allow future franchisees to licence them for use in their own operations.

At this point, you may wish to engage consultants and franchise lawyers who can look at your business and advise on how suitable your company is for a franchise model and the next best steps.

Agreement

To franchise your business means to allow a franchisee to distribute and market goods and services under your brand, including using your intellectual property. It’s therefore key to put in place robust franchising documentation to ensure you have an organised business structure, with the roles and responsibilities of each party clearly defined. It is recommended that you seek professional legal advice to draft and review your key documents, including the franchise agreement and disclosure agreement.

Your franchise agreement is the building block for your future commercial and legal relationship with franchisees, so it is important to get it right. The document will cover access to your brand, business model, information and data. Your agreement will set out responsibilities of the franchisee, which will likely include paying the franchise fee, delivering on set performance criteria, and operating the business within defined parameters and geographical area.

It will also detail whether you are providing the franchisee with the exclusive right to operate their franchise in a certain area, or whether you are retaining the ability to expand your business through franchises with others. It will also set out your responsibilities as a franchisor, which could include providing ongoing training, support and equipment, and organising marketing arrangements. The contract will also set out the circumstances for which either party could terminate the agreement. The length of the document will depend on how complex the business is but it’s well worth the time and effort to get everything in place at this stage.

Disclosure

One of the most common areas of dispute between franchisee and franchisor can be misrepresentation. The disclosure document aims to prevent this by giving a transparent overview of the business upfront. This allows the prospective franchisee to ask any questions and make an informed decision with all the information in front of them. The disclosure document is provided with the franchise agreement and is a legal document which outlines what the franchisee should know before signing on the dotted line. In particular, it will set out upfront fees, ongoing royalties, whether the franchisor will have a legal obligation to be involved in the franchisee’s actual operations, and financial disclosures. It may also touch on details of the franchisor’s trademark and intellectual property and future access to an operations manual supplied by the franchisor. This is important for both parties – you want franchisees who share your standards and aspirations. Imagine working so hard to set up a successful business, and then seeing it adversely affected by the actions of someone not totally on board with your aims and ideals. Having a thorough legal structure in place gives you the best chance of avoiding this.

Other key documents

A franchise agreement and a disclosure agreement are your most basic requirements, but there will likely be many other key documents that define how your franchisees will operate their businesses. You may also choose to draw up training manuals which will give franchisees a guide on how to run their business. After all, it’s this knowledge and experience that will make your franchise so appealing.

Protection

During negotiations, a lot of commercially sensitive information may be shared, so as a business it is necessary to protect your interests. This could include customer data, recipes or formulas that form the cornerstone of your operation.

Before entering into lengthy discussions with any potential franchisee, franchisors sometimes require interested parties to sign a legally binding document called a non-disclosure agreement (NDA) or confidentiality agreement. These agreements help to prevent information obtained during the negotiation process from being shared or used without your permission. As every business is different, we recommend working with experienced lawyers who can help you to draw up documents that protect the business you have worked so hard to build.

The author

Sarah Aldersley is a practice leader at commercial law firm LegalVision, specialising in a variety of corporate areas including franchising.