Summary
- Business format franchising gives franchisees access to the franchisor’s brand, business model, systems, training and support.
- The franchise agreement should clearly set out fees, territory rights, trade mark use, operating standards and termination rights.
- Franchisors should document their model before expansion, as weak systems can create disputes and brand risk.
- This guide explains business format franchising for franchisors, franchisees and growing businesses in the UK.
- LegalVision’s business lawyers specialise in advising clients on franchise agreements and franchising structures.
Tips for Businesses
Document the operating model before selling franchises. Align the franchise agreement, operations manual, trade mark rules, training and support. Test whether franchisees can follow the system profitably. Review fees, territory rights and termination clauses before expanding the network.
A business format franchise lets a franchisee copy a proven business system under the franchisor’s brand. The franchisee receives more than a trade name. They usually receive training, operating standards, trade mark rights and ongoing support. In the UK, the franchise agreement does most of the legal work because there is no single franchise statute that governs every franchise relationship. The British Franchise Association also remains a key industry reference point for ethical franchising, accreditation and market data. A strong business format franchise needs clear contracts, a usable operations manual and careful control of brand standards. This article will further explore the concept of business format franchising.
What Are the Types of Franchising?
Franchising involves a franchisor giving another party rights to operate a business that uses the franchised brand’s trade marks, operating systems, and business model in exchange for an initial investment and ongoing fees.
Franchise agreements underpin all franchisor-franchisee relationships, but not all franchise agreements are the same considering the different types of franchising. Types of franchising include:
- business format franchising;
- product distribution franchising;
- manufacturing franchising; and
- management franchising.
Each approach carries different duties and obligations for franchisees and franchisors. The business format approach is one of the most comprehensive. Business format franchising means franchisees typically receive a complete package, including:
- a proven business model; and
- rights to use the franchisor’s intellectual property.
What is Business Format Franchising?
Business format franchising is the approach people often think of when they imagine franchising. Under this approach, the franchisor provides the franchisee with a business in a package. The franchisor assists the franchisee in setting up their unit and trains them to run a business, replicating the franchisor’s business model.
The franchisee’s initial investment covers the cost of setting up their unit and purchasing the rights to use the franchisor’s trademarks. The franchisor will then provide initial training to prepare franchisees to:
- run their units;
- familiarise them with the brand; and
- instil industry knowledge.
Franchisees pay ongoing royalties and fees to the franchisor for the duration of the agreement. Popular UK-based business format franchises include convenience stores such as One-Stop. These stores have the same aesthetic, branding, processes, and products.
Business format franchisors support franchisees while they operate their businesses and assist with aspects such as marketing.
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Key Obligations Before Using the Business Format Model
Before offering a business format franchise, a franchisor should turn its existing business into a system that another operator can follow. This usually means documenting how the business works, how franchisees must use the brand and what support the franchisor will provide.
The franchise agreement should then match that system. It should explain the franchisee’s territory, fees, training, reporting duties, brand standards and termination rights. It should also state how the franchisee can use the franchisor’s trade marks, confidential information, suppliers and marketing materials.
The operations manual should support the agreement. It can set out daily procedures, customer service rules, staff training standards, technology use and quality control processes. This helps franchisees run their units consistently without making the agreement too detailed.
For franchisors, the main risk is promising more support than the business can deliver. For franchisees, the main risk is buying into a model without understanding the controls, costs and performance obligations.
What Are the Advantages of Business Format Franchises?
| Advantages | Explanation |
| Franchisor Control | It can be easier for franchisors to retain control of their brand and its reputation under business format franchising than with other franchising methods such as manufacturing or product distribution. However, this can also depend on how carefully you draft the franchise agreement. Seeking legal advice about the franchise agreement can help you protect your brand’s reputation. |
| Brand Growth | As a franchisor, you are responsible for assisting your franchisees in setting up their business, but they are accountable for managing their teams and day-to-day operations. If the franchises are functioning effectively, this will positively impact your brand’s overall health and can attract further opportunities for growth. |
What Are the Disadvantages of Business Format Franchises?
| Disadvantages | Explanation |
| Franchisor Investment | Franchisors often invest substantial time and money into translating their existing business into a replicable model that franchisees can copy. For example, you will need to: + create a training program complete with learning materials; + conduct market research; + provide franchisees with your knowledge by writing a franchise operations manual; + help franchisees set up their units; and + provide ongoing support. The amount you will need to invest to turn your business into a franchise depends on its industry, size, and plan. |
| Reputational Damage | There is a risk to your brand’s reputation with any form of franchising. However, while the business format model can help you retain control of your brand, this requires robustly worded franchise agreements. The franchisees’ businesses will be the face of your brand. Therefore, any wrongdoing on their part can negatively impact your brand’s reputation, and the overall network can suffer. |
This handbook covers all the essential topics you need to know about franchising your business.
Key Takeaways
In business format franchising, franchisors provide franchisees with a comprehensive package that includes rights to their intellectual property, a proven business model, and extensive training on how to operate their units. This approach offers franchisees a turn-key solution to starting and running their own business while benefiting from the franchisor’s established brand and expertise. This method can be effective for brand growth and will suit businesses with easily replicable business models. Nevertheless, the business format often requires franchisors to invest significant amounts to begin franchising.
If you need help franchising your business, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What should a UK franchise agreement include?
A UK franchise agreement should cover fees, territory rights, contract duration, dispute processes and each party’s obligations. It should also explain how franchisees can use the brand, systems and trade marks.
What documents do I need to franchise my business in the UK?
LegalVision identifies three key documents for franchising a business: the franchise agreement, the operations manual and the disclosure document. Together, they define the legal relationship, day-to-day systems and key information for franchisees.
How is a franchise different from a licence agreement?
A licence usually grants rights to use a brand, technology or asset. A franchise is broader because it usually gives access to the franchisor’s business model, systems, supply chains and operations manual.
What rights do franchisees usually receive?
Franchisees usually receive rights under the franchise agreement. These can include the right to use the franchisor’s intellectual property, access training and support and operate the business under the franchisor’s system.
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