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Operating a franchise offers an opportunity to run a business with a proven business model. Compared to starting a business from scratch, the reduced risk that comes with franchises is attractive to entrepreneurs. However, when buying a franchise, there are several key legal factors you should keep in mind. This article will explain crucial legal considerations involved in purchasing a franchise in the UK.
What Does it Mean to Buy a Franchise?
Buying a franchise means that you have bought the rights to operate a business under the name and trademarks of another. Often, you will also obtain the rights to use the products and operating systems of the franchised business.
To buy a franchise, you must first find a franchise opportunity that is right for you. You will pay an initial franchise fee to obtain the rights and set up the business unit. Once operational, you will owe ongoing payments to the franchisor.
There are many successful franchises in the UK. These include Subway and Costa Coffee. As an example, for somebody to open a Subway franchise unit, they would need to:
- enquire about a Subway franchise opportunity;
- research and learn about the business to see if this is the right franchise opportunity for them;
- apply for the opportunity;
- read the franchise disclosure document; and
- pay the franchisor an initial franchise fee for the rights to use Subway’s branding, products, and operating systems.
Discover the key legal and commercial issues to consider when buying a franchise.
Purchasing an Existing Franchise
You could purchase an existing franchise unit instead of opening a new outlet. As a prospective buyer, you must seek the approval of the franchisor as they will decide whether you are suitable to operate the franchise. This option has the added benefit of owning an operational business but may involve additional fees and costs compared to the new franchise route. If you are purchasing an existing franchise, the same legal considerations exist.
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Key Legal Considerations When Buying A Franchise
1. Due Diligence
Once you have found a franchise opportunity, the first step in your journey is to carry out your due diligence by gathering and reading as much information as possible about the franchise and the franchisor. Ask questions, read all the documents you are provided with by the franchisor, and conduct your own thorough research.
2. The Franchise Agreement
If you decide this is a suitable opportunity, the next step is negotiating the franchise agreement. Your unit is a separate business entity from the franchised business. However, your unit’s operations are not entirely independent from the franchised business. You must comply with the terms set out within the franchise agreement. This is the contract that:
- forms the basis of your relationships with the franchisor;
- outlines how to operate your business; and
- sets out your responsibilities and the standards expected of you.
When you want to join a franchise, you will negotiate the terms of the franchise agreement. The terms should protect both you and the franchisor. The key aspects you should look for include:
- the provision of a suitable training programme and ongoing support for you and your employees;
- the length of time the franchise agreement is in place;
- how you or the franchisor may terminate the agreement;
- whether you have exclusive territory rights; and
- information about suppliers and quality standards.
3. Businesses and the Law
As with all businesses, once your franchise is operational, you must comply with any applicable laws. These include:
| Employment Law | If you have employees, you must comply with all relevant employment laws. This includes: registering as an employer; obtaining employers’ liability insurance; providing suitable pay and employment contracts; protecting workers’ rights; andcomplying with GDPR. |
| Finance Regulations | Finance regulations include tax, accounting, and pay. The type of finance regulations applicable to you will vary based on whether you operate as a sole trader, limited company or limited liability partnership. |
| Industry-specific Regulations | Depending on the industry your franchise operates within, you may need to comply with industry-specific laws. You may need additional licences or to abide by the regulations of professional bodies. |
Key Takeaways
Owning a franchise can be an excellent opportunity to run a business with a proven business model with less risk than beginning a new business from scratch. When joining a franchise or buying a resold franchise, you must carry out thorough research on the opportunity to assess whether it is right for you. Then, when you formally begin purchasing the franchise, ensure the franchise agreement protects both you and the franchisor. Finally, when your franchise is operational, you must comply with all relevant laws and regulations, including employment law, finance regulations, and industry-specific rules.
If you are considering buying a franchise or are already in the process, seek legal advice. A solicitor can provide valuable guidance throughout this process. They can help from the start by researching the franchise opportunity and helping you to negotiate a franchise agreement suitable for you and the franchisor. If you would like advice about joining a franchise, 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.
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