Top ten tips for incoming or prospective franchisors

Article by Fiona Boswell

Fraser Brown

Franchising in any country is all about the brand – to develop a franchise network in the UK you will need to ensure that your brands are registered here. This may be by extending an existing international trademark registration to apply to the UK also or registering a community trademark with OHIM (as it is generally more cost effective to apply for one registration that covers your brand throughout the EU than applying to register it in the UK alone).

1. It’s all about the brand

Franchising in any country is all about the brand – to develop a franchise network in the UK you will need to ensure that your brands are registered here. This may be by extending an existing international trademark registration to apply to the UK also or registering a community trademark with OHIM (as it is generally more cost effective to apply for one registration that covers your brand throughout the EU than applying to register it in the UK alone).

Registration is vital for the growth of your brand in the UK marketplace–as it grants you the monopoly right to use the brand (subject to payment of renewal fees). This also applies to securing the local domain names for your brand and the registration of designs. Note there is no requirement to register ownership of copyright in the UK.

Practical tip - check your brand works in the UK and doesn’t have any adverse associations. Avoid relying on business partners to do this it can be a costly exercise to practically secure ownership of your brands registered in foreign territories once you fall out with your business partner.

2. Cut once measure 10 times

You will need to have already established that your business is suitable for the UK market. Get some guidance from specialist franchise consultants on whether your franchise will work in the UK –understanding the local market is key to the success of your business. Ideally you should have a test run to flag any areas that may need work. The lessons learnt in doing this will be valuable for the future of your franchise operation.

3. Choose your growth structure wisely

Next you will need to look at how you want to operate your franchise –there are normally three ways to do this 1. Individual franchise, 2. Area franchise and 3. Master franchise.

Individual Franchise
This involves you setting up a limited company in the UK and developing the franchise yourself.

Master franchise
This is appointing a company or individual to develop the network in the territory for you. The master franchisee trains, recruit and supports the franchisees whilst you provide some support and control what the master franchisee does. The master franchisee gets its income generally from franchise fees and usually a fee based on sales turnover and you receive your income typically from products sold(usually by way of a mark-up).

Practical Tip: You must be confident of the aptitude, integrity and financial standing of this business partner and have the time and resources to invest in their development.

Area Franchise
This is similar to the master franchise but instead of being given the whole of the UK to develop you appoint them to grow your business in a specific area only.

Practical Tip: -there are other options –joint venture and hybrid franchise structure that might be more suitable for you depending on the level of control that you require. Take advice at the outset on your proposals to ensure that you start with a structure that meets your requirements. It is costly to adapt the structure at a later stage.

4. Make sure you look the part

You will need to have appropriate systems, manuals and contracts in place to operate your franchise. English laws do not currently prescribe that you require any particular documentation to operate, or recruit for franchises and neither are you subject to any formal registration or disclosure process, as applies in other European countries. Likewise, generally you are not liable to make payments to franchisees when they cease to operate a franchise business in England.

However, the British Franchise Association the leading trade body for the franchising industry in the UK, recommends that franchisors have a disclosure document specifying key details about the franchise which is disclosed to franchisees prior to them signing up. This is in line with many of the requirements of other European countries and whilst not law is good ethical franchising practice which will help attract quality franchisees and also be useful evidence to counter any misrepresentation claims.

Without specific legislation governing the operation of franchises it is even more important to implement robust contracts that specify the obligations of the master franchisor and master franchisee and corresponding contracts with sub-franchisees. These will work in conjunction with your operations manual as the key tools for policing the operation of your franchises. Generally these contracts are subject to English law and English courts as this is where your franchises will be. If you are an incoming franchisor this may mean you need to tweak your existing documentation pack to comply with English laws.

Practical Tip: Ensure that you own any of the materials/software/websites etc created as part of your package of franchise materials. In English law the fact that you have commissioned and paid for the work does not mean that you own the rights in it. Make sure that you have a contract in place with any contractors that ensure you own the work created. This needs to be drafted carefully to be enforceable.

5. Make your contract your bodyguard

In terms of policing your franchisees there are key areas were English laws impose specific obligations on businesses. Data protection is an area of extreme sensitivity and your franchise contracts and corresponding manuals will need to include clauses that ensure that the franchise network is operated in accordance with data protection laws.
Anti-Bribery is another area heavily policed in Europe with corresponding fines and risk of imprisonment for businesses that do not comply.

Using the internet and social media are also areas that businesses need to be aware of and it is vital that you implement a social media policy for your franchisees that specifies in what ways they can use the internet and social media so as to avoid tarnishing your brand.

Nb - Competition laws prevent outright bans on internet usage as prohibitive of passive selling but measures suitable to legitimately protect your brand are permitted. Get advice on how to structure your contracts to ensure that measures concerning the use of social media and the internet are enforceable.

6. Keeping your business, your business is important

Prevention of competition is a key area for any intending franchisor and your contracts should include appropriately drafted restrictive covenants to legitimately protect your business interests and the goodwill of your brand once a franchisee ceases to operate an outlet. To be enforceable these must be carefully drafted so take advice (see point below regarding infringing completion laws). Likewise you should ensure that you have signed non-disclosure agreements with potential investors prior to disclosing sensitive information regarding the operation of your franchises and have taken some financial payment from them (deposit) to demonstrate their commitment to the project.

7. Do not promise what you cannot deliver

Ensure that your marketing and recruitment material are vetted for compliance with English advertising laws that protect against misrepresentations –take special care regarding profit forecasts. It is best to under promise as discrepancies will not only ruin your reputation in the franchise market but land you in hot water with advertising authorities and consumer watchdogs resulting in hefty fines.

8. Avoid infringing European Competition Laws

Competition laws impact on a variety of key concerns for those considering franchising in the UK. Pricing controls – are a particularly sensitive area –and agreements or concerted practices that seek to control pricing in franchise networks (by imposing minimum or set prices) will fall foul of competition laws rendering your agreements unenforceable. Some forms of price promotions and restrictions on excessive pricing are permitted but again these must be carefully drafted.

If you plan to exclusively supply your franchise network in the UK any restrictions on the network seeking products elsewhere must be carefully drafted to comply with competition laws. Get advice on whether this will apply to you as it is a complex area.

9. Get sector specialist advice

If your business operates in a heavily regulated area – eg drinks, hospitality and leisure, care industry, food you will also need specialist advice on English laws that affect the operations of this type of business in England. Your choice of business partner should have familiarity with the requirements in England or at least have trusted specialist advisors to provide guidance on compliance requirements.

10. Get in with the right crowd

The key to successful franchising in the UK is attracting the right franchisees to your business. Membership or association with the British Franchise Association as an ethical body that regulates the operation of franchises by its members will help to add credibility to your brand. Likewise using suppliers and adviser that are vetted by the BFA will also ensure that you are receiving specialist advice.

Fiona Boswell
Head of Franchise
Freeths LLP
0845 070 3812

Last Updated: 04-September-2014