Buying a franchise is a major investment and for most individuals it is a once in a lifetime opportunity. Without the funds available to reinvest in another franchise if the chosen one proves to be unsuccessful, it is an important decision to get right. Matthew Downing, a Solicitor in the Commercial team, looks at some important considerations for franchisees when deciding whether to buy a franchise.
It is vital the franchisee finds out as much as possible about the franchisor through undertaking due diligence, before deciding to invest in a franchise. In the case of franchisors who are members of the British Franchise Association (“BFA”), they are compelled to provide comprehensive information on the franchise’s viability to prospective franchisees. Initial disclosure lets the franchisee know want they are buying into and allows them to try and establish whether the franchise is likely to make a good return on their investment. The information to be requested should include, but should not be limited to, the franchisor’s details and ownership structure, projections, development plans, and current franchisees’ information and performance. A well organised franchisor will also have open days, offer detailed information packs, have information available on the internet and attend trade exhibitions, which are all useful opportunities to find out more about the franchise before deciding whether to invest in it. Some franchisors also have arrangements with banks to help with the initial investment and to offer advice to franchisees on the investment they are making.
What the franchisee needs to ensure is that they are being offered a tried and tested business model. If the business model is poor the franchise could face problems from the start. In general, most franchisors are trying to achieve the same result in establishing a good network of franchisees to promote its brand and increase its profits. However, franchises (especially those with a poor business model) do not always work and this could result in the franchisee suffering significant financial loss.
It is important to be aware that there is little regulation of franchising in the UK and there is currently no specific franchise legislation. Franchising is seen as a commercial arrangement and is treated in accordance with the general rules of commercial law and practice. As a result of this the Franchise Agreement (the contract between the franchisor and franchisee) becomes the document that governs the relationship and sets out each parties’ rights and obligations. This document should be carefully considered by the franchisee before entering into it.
The BFA requires that its members abide by the BFA code of Ethics, which provides some safeguards for franchisees buying a franchise from BFA members. If a member fails to abide by its requirements, the BFA can enforce adherence by withholding accreditation and membership. Though it would be preferable for the franchisor to be a BFA member, this does not mean that non-members should not be considered for investment. There may be valid reasons why they do not have membership, especially if the franchise is a relatively new one. However, in such a case a more cautious approach is required.
Usually it is considered that the Franchise Agreement is a non-negotiable document and in many cases this will be correct. However, if there are fundamental flaws with an agreement then it would be prudent for a franchisor to take this on board, as it is likely it will be the standard agreement used for all the franchisees in its network and an unworkable agreement could have far reaching implications. Less established franchisors may also be more willing to negotiate, but this should also raise caution. If an agreement is unreasonable or needs a number of amendments to make it work, then this would be a good indication of whether the franchisor has invested time and money in making sure its franchise is well structured from the start. A prudent franchisor should invest in legal advice to ensure the agreement is well drafted and works, to avoid the risk of having to negotiate different agreements with each of its franchisees. The agreement should not be a solely one sided agreement and needs to include provisions relating to genuine concerns of the franchisee and provide a number of support mechanisms to assist where possible. However, the franchisor should have the majority of the control in the agreement as it needs to protect its network of franchisees and it needs to be able to take action against any franchisees damaging this network.
The Franchise Agreement itself is a complex and lengthy document and deals with a number of important issues, below is a summary of some of the key provisions:
• Identify of the franchisor and the ownership of the franchise;
• The rights being granted to the franchisee;
• The rights to use the corporate image and other Intellectual Property of the franchisor;
• Duration of the franchise and the franchisee’s renewal rights;
• The territory the franchisee is able to operate in;
• The duties of the franchisor and franchisee;
• The parties’ rights to terminate the arrangement;
• Financial obligations including initial fees, management fees, royalty fees and renewal fees;
• Confirmation of who will train the staff and the staffing levels required;
• The operations manual to be adhered to by the franchisee;
• Clarification of the specific laws and regulations relating to the business that the franchisee must comply with;
• Confidentiality obligations imposed on the franchisee in respect of how the franchisor operates;
• Restrictions to be imposed on the franchisee during and after the length of the franchise arrangement;
• Clarification of the initial and ongoing support to be provided by the franchisor;
• Confirmation of the leasing of premises requirements and obligations that are imposed on the franchisee relating to the lease.
The main reason for a franchisee to take legal advice is to ensure they fully understand all the obligations being entered into and the potential risks they face. If there are unreasonable or unworkable provisions in the agreement and the franchisor is not willing to negotiate, the franchisee needs to be aware of this and decide whether to take the risk. As franchising is becoming more popular in the UK, if one franchise is not acceptable, there is likely to be another suitable opportunity available that could make a better investment.
As can be seen in this quick overview of some of the important issues, there is a lot to consider before entering into a Franchise Agreement and taking time to take legal advice before doing so could be the best investment the franchisee makes. Once the Franchise Agreement is signed, the franchisee will be deemed to have read and understood the provisions and ignorance of the provisions of the agreement or the law will offer the franchisee no excuse if they want to try and escape the agreement at a later date.
For advice on buying a franchise, reviewing a Franchise Agreement or general advice relating to franchises, contact Matthew Downing by telephone on 01603 598000 or alternatively by email to mdowning@steeleslaw.co.uk.