Harmanjot:
Hi everyone, welcome to our webinar on how to franchise your business in the UK. My name is Harmanjot, and I’m an associate in LegalVision’s Corporate and Commercial team. I’m joined today by my colleague Paul, who is a senior associate in our franchising team.
Before we begin, a couple of quick housekeeping items:
- You’ll receive a recording of the webinar at the end, so no need to frantically take notes.
- There’s a chat box for you to submit your questions, and we’ll answer them at the end.
- After the webinar, a brief survey will pop up on your screen. We’d really appreciate it if you could take a couple of minutes to fill it out so we can ensure our webinars are useful for you.
- All attendees are eligible to receive a free consultation with us to discuss how we can help you with your contracts or any of your franchising plans. To request your free consultation, provide us with your contact details in the survey that appears at the end of the webinar.
Let’s get on with it. Today we’ll be discussing:
- Some commercial questions to think about when considering franchising,
- How you should structure your franchise,
- Trademarking and IP protection,
- Your systems and processes,
- Your operations manual,
- Ensuring your contracts are suitable,
- Briefly, what you need to consider regarding GDPR,
- And finally, what to include in your franchise agreement.
At the end of the webinar, we’ll answer some of your questions, so please submit them through the chat function. We’ve got a lot to cover, so I’m going to hand over to my colleague Paul, who will speak about what you should think about if you’re considering franchising. Thanks, Harmanjot.
This guide outlines key considerations and obligations you should be aware of when managing a UK franchise network.
Paul:
So, to begin, becoming a franchisor often starts with asking yourself a number of questions about your business. Franchising isn’t suitable for every business model, and a good franchise system is one that is well thought out in advance. Let’s look at some of those questions now:
- Is my business model distinctive and replicable?
This involves thinking about whether your business model would perform just as well in a completely different location, with completely different people leading it. We always suggest you trial a second location to test this idea. If a manager can replicate your success by following your model, this is a good indication that your business is suitable for franchising, as it’s not heavily reliant on a particular person or location. - Will I be able to manage, train, and support a franchise network?
Operating a franchise requires you to pivot into a new kind of role—a training and management role. Training and supporting franchisees is both essential and time-consuming, and the time involved should not be underestimated. The best franchise systems are those that have a clear and learnable system and invest in training, retraining, support, and the growth of their franchisees. - Do I have the relationships with suppliers, manufacturers, etc., that can support my growth?
It’s essential as a franchisor that your suppliers can actually supply your network. Franchisors are well placed to source quality products at cost-effective rates, which is essential for your franchisees, allowing them to focus on growth.
If the answers to these questions are no or show that more work needs to be done, this is often a good thing. It’s much easier to take stock, plan, and revise before you have a franchisee than after they’re on board. A franchise consultant can be a great asset to you for these kinds of feasibility questions early on.
Now, I’ll hand over to Harmanjot, who will take us through the preferred corporate structure for a franchise. Thanks, Paul.
Harmanjot:
So, most businesses, particularly those that have grown and are starting to think about franchising, will generally be operating using a single company structure. For franchisors and other businesses, we generally recommend a dual or multi-company structure. This allows a franchising business to separate out its assets and ensure that the moving parts of the business are protected should something go wrong.
In this structure, there’s typically a holding company at the top that holds valuable assets and then one or more operating companies that enter into the contracts. This is particularly important for franchisors to ensure their intellectual property is protected, as it is the biggest asset the franchisor has, and the IP often determines the value of the franchise network.
What this will look like in practice for a franchisor is as follows:
- A holding company to own the trademarks and other intellectual property, like your operations manual,
- A company to act as the franchisor to enter into the franchise agreements with franchisees,
- If the business operates from a premises, a separate leasing company to enter into the leases,
- If you intend to continue operating your flagship store or your first franchise yourself, a separate operating company to run that business.
With this structure, the holding company should not trade with or enter into contracts with any third parties so that the valuable IP is protected and kept completely separate. If something does go wrong, the franchising company’s primary purpose will be to enter into franchise agreements with the franchisees. It generally won’t have any assets, so if there is a dispute, there are no assets put at risk, and the rest of the contracts continue as they are.
Similarly, the leasing company’s sole purpose will be to enter into leases used for the franchise business. If there’s a dispute with the landlord, such as outstanding rent, and the leasing company is sued, there will be no assets put at risk. The leasing company can be wound up if necessary. Similarly, for the operating company, its sole purpose will be to continue operating the flagship store. This structure ensures that if any of the other companies incur liability, the successful business you’re already operating won’t be impacted.
By separating out the assets of the network into various companies, you’re protecting the longevity of your network and setting yourself up to succeed from the beginning. It’s also important to get this structure set up early on to avoid any large tax bills or liabilities in the future.
There’s a little diagram on the screen showing this structure. Now, I’ll hand back over to Paul, who is going to go into more detail about the IP we’ve been discussing. Thanks, Harmanjot.
Paul:
Now on to trademarks. Trademarks are important and even more so in a franchise system. But what is a trademark? A trademark is a word, phrase, or logo used to identify and distinguish your business. For example, the Golden Arches and “I’m Lovin’ It” from McDonald’s, or brand names like Coca-Cola. Another salient example in a franchise: your trademarks will be your main brand and logo, but they could also include variations of this, product lines, or slogans that you use in trade.
Importantly, the name you picked for your business at Companies House is not the same as a registered trademark and does not offer you any protection for your brand. This is a key thing that many businesses don’t realise when they’re starting out. Therefore, we recommend all businesses, whether you intend to franchise or not, register a trademark for their brands.
Paul:
Now, let’s go through the registration timelines for trademarks. The trademark process is typically quite lengthy and can take about four months, sometimes longer if you receive an opposition. Despite the lengthy application process, however, you can trade while your application is pending, as your registration will be backdated to the date you made your initial application.
We do recommend only trading if there’s a low risk of your application being rejected, because you don’t want to launch with a specific brand, spend time and money on marketing, and building your brand, only to have to rebrand due to a rejection of your trademark application. Your lawyers can definitely assist with completing a risk assessment before you make your application.
Paul:
Note that trademarks need to be applied for in each country; there’s no automatic worldwide protection. There are pathways that you can take to extend your local application, but it’s still additional applications that need to be made for other jurisdictions you wish to have protection in.
While trademarks are a clear form of IP that every franchisor should seek to protect, it’s also important to ensure that other forms of IP are protected. You can do this by having contracts in place with robust IP clauses setting out who owns what IP and what licences are being provided in respect of that IP.
Also, consider whether other forms of registered protection apply to the products and services you’ll be using in the franchise. For example, whether you can register a patent or a design. Regularly monitoring the trademark register and the market generally is also important to ensure other businesses aren’t encroaching on your intellectual property.
Paul:
For instance, if you do find that there are any businesses encroaching on your IP, you can enforce your rights against them by sending a cease and desist letter regarding those marks. Now, Paul is going to take us through how you can go about consolidating and refining your systems and processes.
Harmanjot:
What are your systems and processes? These are the ways in which your business currently operates and functions, and it refers to the ways in which your franchise network will operate. An example of a system is a point-of-sale software that you might use in your business. An example of a process might be how you normally deal with a new customer or lead on a daily basis.
When franchising, it’s important to ensure your systems and processes are clear and refined so that you can have consistency in your business model no matter who’s running it. While some franchisors give thought to how the franchise network will run after they franchise, it’s important to consider this prior to the franchising process, as it sets your network up for success from the beginning.
Here are some systems and processes you might consider streamlining before you franchise:
- Your point-of-sale software,
- Reporting, such as sales data, profitability, or accounting obligations,
- Payment obligations,
- Ordering of products and equipment in the business,
- Customer relationship data and procedures,
- Employee onboarding and documentation for that onboarding,
- Software systems or intranet for the franchise,
- And related questions around the operations manual.
Harmanjot:
Why is it important to ensure that your systems and processes are replicable? We’ve touched on this, but it’s important to get these systems and processes right so they can be replicated in a franchise network. The ultimate goal of a franchise network is to have multiple franchises who have taken your model and are equipped to replicate it in a new location.
That replication is a lot easier for you and your franchisee when you have clear and established systems and processes for running one of your franchise businesses. Linked to this is the operations manual, which we’ll look at now.
Harmanjot:
What is an operations manual? The operations manual relates to what we just discussed regarding your systems and processes. It’s a document that takes all your know-how on how to successfully operate your business and summarises it in a clear and concise way. It can be a physical document, an electronic system, or a combination of these.
Why is it important? The operations manual is crucial to your expansion as a franchise network, as it provides all your franchisees with the information they need to successfully replicate your business. The operations manual is also a highly confidential document. It’s essentially a playbook on all the key information required to understand how your business operates.
Harmanjot:
The operations manual will therefore contain a lot of information. Some of this, and there’s plenty more, would include:
- How to handle customers, including how to deal with customer complaints,
- Who your approved suppliers are or your approved product list,
- Information on how to onboard employees, and often any employee policies you use,
- Resources which the franchisee may require to operate their business, or as part of being a franchisee.
Harmanjot:
How do you go about preparing an operations manual? To prepare one, you should start looking at all the systems and processes you have in place within your own business. Some of those things we talked about earlier. Take what is usual information stored in your mind and put it down on paper.
The best operations manuals are often drafted by franchise consultants, who will work with you by discussing these aspects of the business and help you summarise them all within a detailed and official operations manual.
Harmanjot:
Most of the operations manual is not really a legal document. Legal information is what the franchise agreement is for. However, there may be some policies and information within the operations manual that have legal implications. As such, while you’ll typically work with a franchise consultant to get a proper operations manual drafted, you should have a lawyer review the sections that relate to your legal obligations. Some of those would be:
- Employment contracts,
- Privacy policies,
- Disputes,
- Notices.
Harmanjot:
A question we’re asked a lot is: when should you provide a franchisee with the operations manual? Given it contains incredibly confidential information, we suggest following this approach for issuing it to franchisees: It’s better to issue it after they’ve signed the franchise agreement if that’s possible.
If the franchisee wants the operations manual before they become a franchisee, we’d suggest either only doing this after they’ve signed a non-disclosure agreement beforehand or by allowing them to only inspect the manual, not to take a copy of it. The preferred method is to issue it to them after they sign the franchise agreement because the franchise agreement contains all the relevant restraints and confidentiality obligations they need to abide by.
The manual must be handed back when they’re no longer a franchisee. Now, I’ll hand back to Harmanjot to look at your essential contracts.
Harmanjot:
So, what are your key contracts? In addition to the corporate structure, your intellectual property, your franchise agreement, and your operations manual, a great franchise system relies on all of its contractual relationships and how those filter down to its franchisees. We always suggest new franchisors undertake a review of all their own contracts as part of the process of consolidating and writing their operations manual.
These contracts form part of your systems and processes. Some things to think about:
- Do you have adequate employment agreements and employment policies that your franchisees could use?
- Will your contracts with preferred suppliers allow you to grow into a large franchise network?
- Do you have favourable terms with these preferred suppliers, or do these contracts need to be renegotiated?
- Do you have data protection policies that comply with the GDPR?
- Do your existing leases allow you to underlet to a prospective franchisee?
Harmanjot:
These contracts underpin the operation of your franchise network and, therefore, the operation of each individual franchisee. Where they are being relied on, not only do they provide a strong roadmap for growth through consistency, but they also show franchisees that you are invested in their success. Further, a review of these documents also highlights whether there are any IP gaps—situations where the IP you rely on is not properly assigned to you or capable of being used by you under existing contractual arrangements. This materially affects the value of your franchise model. If you don’t own your IP, you can’t license it to your franchisees.
Having a lawyer review, advise, and redraft these documents as required is essential to growing a successful franchise, and it’s certainly something that should be considered before you take on franchisees.
Harmanjot:
I also want to quickly touch on GDPR considerations. It’s quite a niche area, but it’s something that’s very important for all businesses. Franchise laws must ensure they comply with data protection laws when handling personal data. This includes when they collect personal data such as names and addresses of franchisees but also when they have access to end-customer personal data, such as through customer databases from their franchise network.
As a franchisor, it’s not sufficient to leave GDPR compliance up to your franchisees. Like all other areas of your business, you should have processes for your franchisees to follow in terms of how personal data is collected, stored, and used. If you expect your franchisees to share personal data with you, for example, for marketing purposes, you need a lawful basis for sharing that information.
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