Franchising
Part 7 - setting up a business in the UK
What is a franchise?
Although there is no legal definition of a “franchise” under English law the term has during the second half of the 20th century come to be associated with ‘business format franchising’ – that is the granting of a license by a ‘franchisor’ to a ‘franchisee’ enabling the franchisee the use of the franchisor’s brand, trade mark, know how and system of doing business, to operate their own business under the franchisor’s brand name and using the system developed by the franchisor.
Requirements for valid franchise agreement
There are no franchise specific laws under English (or Scots) law. A franchise agreement is therefore a form of commercial contract, which is governed by the same principles as any other commercial contract under English law. That said, there are nuances to franchise agreements, due to the specific relationship that exists between franchisor and franchisee that need to be given careful thought when creating or negotiating franchise documents. If the Franchisor is a member of the British Franchise Association, the Franchisor’s FA in the UK will also be subject to the Guide to Ethical Franchising, a self-regulating code of conduct imposed by the British Franchise Association (BFA) on member franchisors. Membership of the BFA is however not a mandatory requirement in the UK.
How is franchising regulated in the UK?
The franchising industry in the UK is self-regulated by the British Franchise Association which requires its members to comply with the BFAs ‘Guide to Best Practice in Ethical Franchising’ based on the European Code of Ethics for Franchising.
Master franchisee essentials
If you intend to represent a well-known brand and quickly build a network of franchised businesses using that brand’s trademarks, system and know how, you may want to consider a form of multi-unit franchising known as master franchising. As the Master Franchisee in the territory, you will act as the de facto franchisor, responsible for recruiting sub-franchisees, entering into the sub-franchise agreements with the unit franchisees, supporting the network of sub-franchisees providing training and support to the network of sub-franchisees (as if you are the franchisor).
Form of master franchise agreement - The franchisor will specify the form of the Master Franchise Agreement (MFA) and the form of the unit franchise agreement (FA) which you will have to enter into with each sub-franchisee. The FA is usually an annexe to the MFA. As the master franchisee you will often be required to open your own franchise unit and to run it as a pilot for a period before you will be permitted to start selling sub-franchises. This is to ensure you become intimately familiar with the franchise system yourself, so you will be able to support sub-franchisees you enter into FAs with later on the MFA will include obligations on you for example a development schedule setting out minimum numbers of sub-franchisees you must enter into FAs with, restrictions on how to use the brand and obligations not to infringe any of the franchisor’s Intellectual Property Rights.
Control over the sub-franchisee - All of franchisor’s ability to control the sub-franchisee comes through the MFA, in terms of the controls the franchisor will put on the Master Franchisee. In a master franchise structure there is no direct contractual relationship between the franchisor and the sub- franchisees.
Flexibility to sell the master franchise and the network created to a third party - The Master Franchisor will not be entitled to dispose of any FA with a sub-franchise with the franchisor’s consent. In many cases the franchisor mu have a right of first refusal in relation to any proposed disposal by the Master Franchisee of any FA with a sub-franchisee. Furthermore, the MFA will also usually include a change of control termination right in favour of the franchisor, so the shareholders of the Master Franchisee will not be able dispose the Master Franchisee without the franchisor’s consent
Franchise fees you will normally pay
The following are the types of fees you will typically face in a franchise:
- Territory fee - a fee paid in signature of the MFA for the exclusive right to exploit franchising opportunities in the territory
- Store opening fee - on opening of each store under a unit FA
- Renewal fee - often paid to extend the term of the MFA or a unt FA
- Design fee - for assistance with unit location and designs
- Ongoing franchise fee (or royalty) - usually a percentage of gross revenues
- Marketing contribution - usually a percentage of gross revenues - to be used for marketing
Glossary of franchise terms
Franchising takes many different forms which have evolved over time. As a result, the language associated with franchising can be vague and sometimes confusing. To ensure there is a common understanding of your goals and to enable consistent and clear communication of strategies and messaging on a global basis, it is important that there is a common baseline. We have therefore prepared a helpful Glossary of common franchise terms which can be accessed here (to be created).
Meet our team
Philippa Dempster
Senior Partner & London Office Managing Partner
Lisa Gilligan
Leicester Office Managing Partner
Simon Barker
Partner & Head of Intellectual Property
Contact us today
Whatever your legal needs, our wide ranging expertise is here to support you and your business, so let’s start your legal journey today and get you in touch with the right lawyer to get you started.
Get in touch
For general enquiries, please complete this form and we will direct your message to the most appropriate person.