How Does Ownership Work in Franchises?

The franchising model bridges the gap between successful established business models and entrepreneurship. Franchising creates business relationships that may seem complex to the unacquainted eye. This article will define how ownership operates within franchising and explain the franchise agreement, the crucial document that forms the foundation of the franchisor-franchisee relationship.

What is Franchising?

The basic franchising concept starts with a business owner with a proven business model. This person will become the franchisor. They have developed a set of products, services, systems, and branding that has proven successful in the marketplace and will be looking to expand their brand. The franchisor expands its brand using the franchising model. This means they grant others, the franchisees, the rights to operate business units under the same brand and replicate their business model. 

Ownership and the Franchisor

The franchisor owns the overarching brand and allows franchisees to use their branding and business model for a limited period. The franchisor does not own the franchisee’s units of business. Franchisors are typically responsible for recruiting and selecting suitable franchisees. The franchisor must provide training to get franchisees started in their roles and ongoing support to refresh, update, and assist franchisees. 

As a franchisor, you will aim to benefit from brand expansion and revenue growth while the franchisees operate their locations. 

Ownership and the Franchisee

Franchisees invest capital to purchase the rights to operate units of business that use the franchisor’s brand, systems, and support. Franchisees essentially become independent business owners of their units but operate under the umbrella of the franchisor’s established brand.

Following recruitment, the franchisee pays the franchisor an initial fee to set up their unit and buy the rights to operate using the franchisor’s intellectual property. The franchisor provides training and guides the initial set-up. The franchisee then pays ongoing fees to the franchisor from a portion of their profits. 

Franchisees are responsible for the daily operation of their units. Likewise, if a franchisee has employees, they are also the franchisee’s responsibility. 

Buying a Franchise in the UK: A Legal Guide

Discover the key legal and commercial issues to consider when buying a franchise.

Download Now

The Franchise Agreement 

Franchisors and franchisees establish their contractual relationship by signing a legally binding document known as the franchise agreement. The franchisor drafts this document and outlines the responsibilities of each party and other important aspects of the franchise, such as:

• fees;
• territory rights;
• training; 
• support; and
• terms of use of the franchisor’s intellectual property. 

The franchise agreement is the foundational document of a franchise relationship. In it, the franchisor defines the terms of ownership within the franchise system. 

Selling a Franchise Unit

When a person has absolute ownership over something, they can use it, destroy it, alter it, and even sell it. Think of a car owner, for example. The owner can use the car when they want. They may even choose to modify it. Should the car owner wish to sell their car, they have the right to do so. An owner can decide and control what happens to their property. In franchising, ownership is slightly more complex. 

The franchise agreement is the basis of the franchisee-franchisor relationship. Within it, the franchisor will outline the conditions under which a franchisee may sell their unit. Often, the sale requires the franchisor’s approval. 

The rights to sell a franchise unit demonstrate the linkage between the franchisor and the franchisee. This aspect, in particular, shows that ownership rights in franchising are more clear-cut than sole ownership. Both parties owe obligations to one another and have their own interests in the franchisee’s unit. However, if you stick to the terms of your franchise agreement, refer to it for clarity, and seek assistance from legal experts when needed, you form a solid foundation for a sound franchise relationship. 

Key Takeaways

Franchising involves business relationships between franchisors and the franchisees operating under their brand. Ownership rights are multi-faceted but can be relatively straightforward. Franchisees own and use their units, while franchisors retain long-term ownership of the overarching brand. 

Ultimately, franchisees are business owners within the framework of the franchisor’s established brand. They operate their business units using the franchisor’s brand, operating systems, and support. In contrast, franchisors own the overarching brand and grant franchisees the right to operate under the umbrella of their brand. Franchisors do not own the franchisee’s individual units but are responsible for managing the franchise system. This responsibility also encompasses the provision of training and support to franchisees. 

If you require assistance 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.