How Does Franchising Work? 

The franchising model enables business owners to expand their brand’s market reach while leveraging the resources and efforts of independent operators (franchisees). Franchisees replicate your proven business model and operate under your brand’s name. This article explains how franchising works and the essential legal requirements involved. Understanding these aspects will help you decide if franchising suits your business and guide you through the process.

What is Franchising? 

Franchising involves granting another person the right to run a business within your brand. They will use your:

• branding;
• business systems; and
• proven business model. 

You, the original business owner, become the franchisor. The person you allow to run a business under your overarching brand becomes the franchisee. You can expand your franchise system by allowing more franchisees to operate businesses within your brand. 

The franchisee will pay you an initial franchise fee to invest in the brand and purchase the right to operate and set up their new business. They will then pay ongoing royalties for the duration of the franchise agreement in exchange for the right to use your branding and business systems. This arrangement allows the franchisee to benefit from your established brand and business model. 

What Is an Example of Franchising? 

To demonstrate how franchising works, we will use an example of a mobile coffee business. Fred, the business’s owner, operated it in London and wanted to expand it nationally. Fred offered aspiring entrepreneurs the opportunity to replicate his success and use his proven business model. They could open and operate their mobile coffee businesses under Fred’s established brand by becoming franchisees. 

Several prospective franchisees, including Mark, who lives in Manchester, were interested in Fred’s franchise opportunities. After reviewing Fred’s franchisee selection process, Mark signed the franchise agreement and paid an initial fee. Signing the franchise agreement and paying the fee allows Mark to operate a mobile coffee business and receive Fred’s ongoing support. 

With Fred’s guidance, Mark opened a thriving mobile coffee business in Manchester. This expansion increased Fred’s coffee brand’s market reach beyond London and into the North West, helping him achieve his brand expansion goals.

Legal Requirements for Franchisors 

1. Franchise Agreement

The franchise agreement is a legally binding contract that outlines the terms and conditions of the franchisor-franchisee relationship, including:

• the rights and responsibilities of both parties; 
• training and support provisions; 
• the duration of the relationship; 
• renewal conditions; and
• termination clauses. 

You will provide prospective franchisees with a copy of the agreement to read and review. Once they sign it, they are a franchisee, and you can begin the process of:

• accepting their initial franchise fee; 
• providing the initial training package; and
• helping them set up their new business. 

2. Franchise Operations Manual

Another crucial aspect of franchising a business is drafting a franchise operations manual. This manual details everything a franchisee needs to know about running a business under your brand, including:

• your business model;
• supply chain information; 
• employment information; and
• performance expectations. 

You will tailor the operations manual to your brand and business model. For example, using the mobile coffee business example from above, Fred’s operations manual should include specific aspects such as:

• health and safety standards;
• customer service protocols; 
• beverage preparation processes; and
• information about licences, permits and insurance. 

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3. Intellectual Property Protection 

As a franchisor with an established brand, you should protect your intellectual property (IP). Your IP includes the following:

• trade marks; 
• patents;
• trade secrets; and 
• copyright. 

Through franchising, you allow others to use your branding, unique systems and innovations and will likely share critical information that gives your brand its competitive edge. IP protection helps to protect your brand’s identity and prevents unauthorised use. 

You should also establish clear guidelines for franchisees about their use and the protection of your brand’s IP. 

Key Takeaways 

Franchising offers a structured way to expand your business. Franchisees utilise your established systems and operate independent locations under your brand. The basis of every franchise system is a web of franchise agreements. Franchisors share these contracts with their franchisees. They stipulate both the franchisor’s and their franchisees’ rights and responsibilities. 

There are several legal requirements involved in franchising a business, including:

• drafting a franchise agreement; 
• creating a franchise operations manual; and
• protecting your intellectual property. 

If you require legal advice about 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 who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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