Understanding the legal aspects of Franchising | Franchising Fridays Podcast

Summary

The podcast transcript from Harper McLeod's first-ever franchising series, hosted by David Key, delves into the legal intricacies of franchising in the UK. Key highlights the lack of specific franchising laws and explains how franchising operates under general commercial law, contract law, corporate law, property law, and intellectual property law, along with the influence of European competition law and the British Franchise Association's code of ethics. The transcript outlines essential legal documents required for franchising, such as confidentiality agreements, deposit agreements, trademark licenses, and operations manuals. It also details the critical terms of a franchise agreement, including fees, territory, duration, performance targets, and renewal conditions. The rights and obligations of both franchisors and franchisees are discussed, along with the procedures for selling a franchise, dealing with death or incapacity of the franchisee, and the consequences of termination. The importance of seeking independent legal advice and the role of the British Franchise Association in governing franchising practices in the UK are also emphasized. The summary serves as a comprehensive guide for those looking to understand or enter the franchising sector.

Takeaways

• 📈 The UK franchising sector is growing, with 44,200 franchisee outlets, employing 621,000 people and reporting a 97% profitability rate.
• 🤝 Franchising in the UK is not regulated by a specific law but is governed by general commercial law, contract law, corporate law, property law, intellectual property law, and the European code of ethics for franchising.
• 📄 Key legal documents for franchising include a confidentiality agreement, deposit agreement, trademark license agreement, and an operations manual.
• 📑 The franchise agreement is the most critical document, often 40-50 pages long, outlining the franchisor's protections and obligations.
• 💰 Initial fees for franchises can range from £5,000 to £45,000, with ongoing management services fees typically between 8-15% of turnover.
• 📆 The standard term for a franchise agreement is often 5 years, renewable subject to performance and satisfaction of certain conditions.
• 🏢 Franchisees may be required to meet minimum performance targets and update a business plan annually with franchisor input.
• 🚫 Franchise agreements include strict compliance with the operations manual and brand standards, with consequences for non-compliance.
• 🔄 Franchisees have limited rights to sell their business, requiring franchisor consent and potentially paying a commission for the introduction of a buyer.
• ⚖️ The British Franchise Association plays a significant role in providing governance and ethical standards for the franchising sector in the UK.
• 👥 The agreement also covers scenarios such as the death or incapacity of the principal franchisee, with provisions for succession or sale of the business.

Q & A

What is the current state of the franchise industry in the UK according to the British Franchise Association survey?

According to the British Franchise Association survey, there are 44,200 franchisee outlets in the UK, employing 621,000 people. 97% of franchisees report profitability, and franchisee satisfaction with their franchisor is at 91%, which has never been higher.

How is franchising regulated in the UK?

In the UK, franchising is not regulated by a specific franchising law. It is governed by general commercial law, contract law, corporate law, property law, intellectual property law, specific acts of parliament like the Trading Schemes Act 1996, European and UK competition law, court judgments, and the European Code of Ethics for Franchising.

What is the purpose of a confidentiality agreement in franchising?

A confidentiality agreement, sometimes called a non-disclosure agreement, is used to protect the franchisor's trade secrets from being disclosed. It is important that one of these agreements is signed before the franchisor shares confidential information with the franchisee.

What is a deposit agreement and why is it used in franchising?

A deposit agreement is used when a franchisor agrees to reserve a territory for a franchisee, often while the franchisee is finding appropriate premises or securing bank funding. The agreement includes a payment from the franchisee to the franchisor, which is typically around £2,000 and is held until the franchise agreement is signed or is refundable if the franchisee decides not to proceed.

Why is a trademark license agreement necessary for a business looking to franchise?

A trademark license agreement is necessary to ensure that the franchisor has the right to use the business's properly registered trademark for franchising purposes. It is prepared between the owner of the business and the franchisor company that is set up for franchising.

What is the importance of an operations manual in a franchise system?

The operations manual is critical as it serves as the franchisor's guide on how to run the business. It is a carefully prepared document that outlines all the important aspects involved in running the franchise system from opening to closing and is usually compiled with the help of a franchise consultant.

What are the key terms typically found in a franchise agreement?

Key terms in a franchise agreement include the rights granted to the franchisee, such as the territory and exclusivity, various fees like the initial fee and management services fee, the term of the agreement, performance targets, and the franchisor's obligations.

What is the typical range for the management services fee in a franchise agreement?

The management services fee is often a percentage of turnover, excluding VAT, and typically ranges between 8% and 15%. However, this percentage can vary and sometimes be significantly higher.

What are the conditions for a franchisee to renew their franchise agreement?

To renew their franchise agreement, a franchisee must have performed to the satisfaction of the franchisor during the initial term and achieved any targets set. They must also serve a notice between 30 and 60 days before the end of the term, and the franchisor may require upgrades to vehicles, equipment, or premises as conditions for renewal.

How does a franchise agreement address the situation of a franchisee wanting to sell their business?

A franchisee must obtain the franchisor's prior consent before selling their business. The franchisor has the right of first refusal, meaning they can buy the business back at the same price and terms as offered by a third party within a specified period, usually around 30 days.

What are the consequences of termination in a franchise agreement for the franchisee?

Upon termination, the franchisee is obliged to cease trading, stop using the branding and IP, return the operations manual, and abide by a restrictive covenant, which typically lasts for 12 months and restricts the franchisee from competing in the territory or soliciting employees, suppliers, and customers.