In Short
- Franchising a business in the UK means checking your model is easily replicable, setting up robust systems and processes and ensuring your intellectual property is secured.
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You will need a clear corporate structure, an operations manual, and franchise agreements that define roles, fees, territories and obligations.
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Compliance matters: protect your brand via trademarks, establish supplier contracts and put data protection and legal frameworks in place before you launch.
Tips for Businesses
Before you offer franchises, trial a second location to test replicability, register your trademarks to protect your brand, and streamline your operations into a manual. Also, determine your fee structure and territory mapping early, and get legal advice on franchise agreements and data practices.
Table of Contents
- Key Topics Covered:
- Is Franchising Right for Your Business?
- Structuring Your Franchise: The Multi-Company Approach
- Trademark Registration and Intellectual Property Protection
- Consolidating and Refining Your Systems and Processes
- The Operations Manual: Your Franchise Playbook
- Essential Contracts for Your Franchise Network
- GDPR and Data Protection Considerations
- The Franchise Agreement: Key Legal Terms
- Q&A Session
This webinar provides comprehensive guidance for business owners considering franchising their business in the UK. Presented by LegalVision’s franchising and corporate law experts, Harmanjot (Associate, Corporate and Commercial Team) and Paul (Senior Associate, Franchising Team), this session covers the essential legal and commercial considerations for establishing a successful franchise network. From assessing whether your business model is suitable for franchising through to drafting franchise agreements, this webinar equips business owners and in-house counsel with the knowledge needed to franchise effectively whilst protecting their valuable intellectual property and minimising legal risk.
Key Topics Covered:
- Commercial considerations when deciding whether to franchise your business
- Optimal corporate structures for franchise networks
- Trademark registration and intellectual property protection
- Developing systems, processes, and operations manuals
- Essential contracts for franchise networks
- GDPR and data protection compliance
- Key provisions in franchise agreements
- Franchise fees and ongoing charges
- Territory mapping and expansion strategies
Is Franchising Right for Your Business?
Paul: To begin, becoming a franchisor quite often starts with asking yourself a number of questions about your business. Franchising is not suitable to every business model, and a good franchise system is one that is well thought out in advance. Let us look at some of those questions now.
- Firstly, 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 is not heavily reliant on a particular person or location demographics.
- Secondly, will I be able to manage, train and support a franchise network? Operating a franchise requires franchisors to pivot into a new kind of role, being a training and management role. Training and support of 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 growth of their franchisees.
- Thirdly, do I have the relationships with suppliers and manufacturers that can support my growth? It is essential as a franchisor that your suppliers can actually supply your network. Franchisors are well placed to source quality products at cost-effective rates, and this is essential for your franchisees who can then focus on growth.
Structuring Your Franchise: The Multi-Company Approach
Harmanjot: Most businesses, particularly ones 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 its business are protected should something go wrong.
In this structure, there is typically a holding company at the top that holds valuable assets, and one or more operating companies that enter into contracts. This is particularly important for franchisors to ensure that their intellectual property is protected, as it is their biggest asset and often determines the value of the franchise network.
With this structure, the holding company should not trade with or enter into contracts with any third parties, and this is so that valuable IP is protected and kept completely alone if something does go wrong.
Different Components and Purposes
| Company | Purpose |
| Franchising Company | The franchising company’s primary purpose will be to enter into franchise agreements with the franchisees. The franchising company generally will not have any assets, so if there is a dispute with a franchisee, for example, and the franchising company is sued, there will be no assets put at risk and the rest of the contracts continue as they are. |
| Leasing Company | Similarly, the leasing company’s sole purpose will be to enter into leases that will be used for the franchise business. The leasing company will not have any assets, so that if there is a dispute with the landlord, such as outstanding rent, and the leasing company is sued, there will be no assets put at risk and the leasing company can be wound up if necessary. |
| Operating Company | And again, for the operating company, its sole purpose will be to continue operating the flagship store. By separating this out, you ensure that if any of the other companies incur liability, the successful business that you’re already operating won’t be impacted. |
Trademark Registration and Intellectual Property Protection
Paul: Now on to trademarks. Trademarks are important, especially in a franchise system. But what is a trademark? A trademark is a word, phrase, or logo that is used to identify and distinguish your business. For example, the Golden Arches and “I’m loving it” from McDonald’s, which we have all heard of, or brand names such as Coca-Cola, are salient examples.
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.
The Importance of Registering Your Trademark
Having a registered trademark gives you an exclusive right. It helps prevent others from using your name and logo. It allows you to take action against those who do. These parties may try to benefit from your established reputation. They may also try to benefit from your goodwill. For this reason, a registered trademark is valuable. Franchisees are paying to use it. They are paying to benefit from your established reputation and goodwill. Franchisees want to know you have registered and protected your trademarks.
A trademark registration lasts 10 years. It can be renewed every 10 years. If you did not have a trademark, someone could copy your brand. You would be forced to rely on common law protections. These are far harder to enforce than trademark rights. Examples include copyright and passing off.
In a franchise system, trademarks form part of your valuable intellectual property. Franchisees will often check whether you have registered them. They do this before they sign up.
Harmanjot: This might not be what some of you want to hear. The trademark process is typically quite lengthy. It can take about four months. Sometimes it takes longer if you receive an opposition. Despite the lengthy application process, you can trade whilst your application is pending. Your registration will be backdated to the date you made your initial application..
Note that trademarks need to be applied for in each country. There is no automatic worldwide protection. There are pathways you can take to extend your local application, but you still need to make additional applications for the jurisdictions you wish to have protection in.
Beyond Trademarks: Broader IP Protection
Whilst trademarks are a clear form of IP that every franchisor should seek to protect, it is 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;
- considering whether other forms of registered protection apply to the products and services you will be using in the franchise, such as whether you can register a patent or a design;
- regularly monitoring the trademark register and the market generally to make sure other businesses are not encroaching on your intellectual property, such as your registered trademarks or your registered patents.
If you find that any businesses are encroaching on your IP, you can enforce your rights against them, for example, by sending a cease-and-desist letter in respect of those marks.
Consolidating and Refining Your Systems and Processes
Paul: What are your systems and processes? These are the ways in which your business currently operates and functions and refer 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 is important to ensure your systems and processes are clear and refined so that you can have consistency in your business model, no matter who is running the business. Some franchisors consider how the franchise network will run after they franchise. However, it is important to consider this prior to the franchising process. This 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; and
- software systems or intranets for the franchise.
Why Replicability Matters
It is important to get these systems and processes right. They must be easily replicated in a franchise network. The ultimate goal is to have multiple franchisees. These franchisees will have taken your model. They must be equipped to replicate it in a new location. Replication is easier with clear and established systems. It is also easier with well-defined processes. These help both you and your franchisee. They provide a roadmap for running one of your franchise businesses.
Linked to this is the operations manual, which we will take a look at now.
This guide outlines key considerations and obligations you should be aware of when managing a UK franchise network.
The Operations Manual: Your Franchise Playbook
Paul: What is an operations manual? The operations manual relates to what we just discussed regarding your systems and processes. It’s a document that summarises your know-how for successfully operating your business 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. 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 is essentially a playbook on all the key information required to understand how your business operates.
The operations manual will therefore contain a lot of information. Some of this 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 that you use; and
- resources that the franchisee may require to operate their business as a franchisee.
Preparing Your Operations Manual
To prepare one, start by looking at all the systems and processes you have in place in your own business, some of the things we talked about earlier. Take what is usually information that is stored in your mind and put it down on paper.
Most of the operations manual is not really a legal document. Legal information is what the franchise agreement is for. However, some policies and information in the operations manual may have legal implications. As such, whilst you will 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 and notices.
When to Provide the Operations Manual
A question we are often asked is when to provide a franchisee with the operations manual, given that it contains highly confidential information. We suggest following this approach for issuing it to franchisees, and it is better to issue it after they have signed the franchise agreement, if that is possible.
If the franchisee wants the operations manual before they become a franchisee, we would suggest either:
- only doing this after they’ve signed a non-disclosure agreement beforehand; or
- allowing them to only inspect the manual, not to take a copy of it.
Essential Contracts for Your Franchise Network
Harmanjot: 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 of 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?
Further, a review of these documents also highlights any IP gaps, or situations where the IP you rely on is not properly assigned to you or is not capable of being used by you under existing contractual arrangements. This materially affects the value of your franchise model, as, if you do not own your IP, you cannot license it to your franchisees.
Having a lawyer review, advise, and redraft these documents as required is essential to building a successful franchise, and it is certainly something to consider before you take on franchisees.
GDPR and Data Protection Considerations
Harmanjot: I also want to quickly have a chat about GDPR considerations. It is a niche area, but it is important to all businesses.
Franchisors must ensure they comply with data protection laws when handling personal data. This includes when they collect personal data, such as the names and addresses of franchisees, as well as when they have access to end customer personal data, such as through customer databases from their franchise network.
As a franchisor, it is not sufficient to leave GDPR compliance up to your franchisees. As with other areas of your business, you should have processes for your franchisees to follow for collecting, storing and using personal data.
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.
You must also consider which situations make you a controller. You must also identify when franchisees consider you their processor. This will determine your obligations. These obligations relate to handling the personal data you receive.
So, it is really important to set out in advance what the process is so that you can ensure that your franchise network as a whole is compliant with the GDPR and who is responsible for what. Regulatory bodies impose large fines on businesses that fail to comply with their data privacy obligations, so this is an important area for franchisors to consider in their networks before they get set up.
Your data protection procedures will form part of your systems and processes and should be set out in your operations manual.
The Franchise Agreement: Key Legal Terms
Paul: The one that we all think about. What is a franchise agreement? A franchise agreement is a lengthy document that governs the key legal terms between the franchisor and the franchisee. It sets out the rights and obligations of each party. It also links with the operations manual to define the relationship between you and your franchisees. The two documents are connected, and franchise agreements are drafted so that a breach of the manual is a breach of the franchise agreement.
What Should You Think About When Preparing Your Franchise Agreement?
As we have touched on, the licensing of your intellectual property. The franchise agreement provides franchisees the right to use your intellectual property. It also allows them to replicate your business model. Therefore, there needs to be a licence for that IP.
This IP is generally licensed for a fee. You also need to consider the fees the franchisee will pay you.
You may retain certain obligations as the franchisor. For example, you might handle marketing for the franchise network. You should consider what financial contributions you’ll require from the franchisee. These contributions would go towards those retained obligations.
Your operations manual contains significant confidential information. In the wrong hands, this could damage your growth plans. You will want to ensure all your intellectual property is protected. This includes the operations manual. Confidentiality provisions should cover these assets.
Franchisees are typically exposed to sensitive business information. Franchisors commonly include during-term restrictions on franchisees. Post-term restrictions are also common. These may cover other businesses the franchisee operates. They may also cover clients they have worked with.
Many franchisees rely on premises to service their customers. You need to consider how the franchisee sources those premises. Alternatively, you might handle that for them. You should also think about fit-out requirements. Design requirements will need consideration too. The franchisee will need to comply with these standards.
Q&A Session
Paul: If we are talking about the percentage of gross revenue that the franchisee makes, there is not so much a standard rate, but a rate that you typically see is between 5% to 8% of monthly gross revenue. That is usually where we would start.
Harmanjot: Yes, we certainly assist with grants of franchise agreements to new franchisees, and this involves tailoring your master agreement to suit the new relationship. We issue that to the franchisee on the franchisor’s behalf. However, we cannot advise the franchisee at the same time. LegalVision membership is a really good tool for this because it is an all-inclusive membership, which means that you will not pay us each time we need to issue a new grant to a new franchisee.
Harmanjot: This all depends on how important the sites are to you as a franchisor and your appetite for risk. If site locations are very important and you have greater buying power than the franchisees to get a good deal, we suggest that the franchisor takes the site. For example, if you are a retail food outlet that operates in shopping centres, this gives you far greater control over the relationship with the landlord. It also gives you greater control over things like the fit-out. If the site is less important, you could let the franchisee enter into the lease and take on that legal responsibility themselves. Really, it just depends on how much control you want to have over the site.
Paul: There is a bit of a strategy to this one, but it is not always clear-cut. The general rule is that the term of the franchise agreement should be long enough for the franchisee to make back its initial investment. The industry standard is that the franchisee’s initial investment costs should be amortised. Generally, it is market standard to see terms of five years. Five years is typically taken as the starting point for most franchises, which is why most franchises that you would see would be a five-year grant. But if the initial start-up costs aren’t so expensive, you can quite often see shorter terms, and the franchisee will be recouping their costs in that shorter term.
Paul: That is a complicated question. It depends a lot on how the franchise is set up, but generally speaking, franchisees of franchisors are not generally their employees, they are not generally their agents, they are a separate legal entity. So, provided that the relationship has not become blurred in some way, generally speaking, the franchisee is liable for things it enters into and the operation of its own business, equally for the franchisor.
Harmanjot: Yes, you certainly can, and this goes back to what Paul was saying about setting out your systems and processes in your operations manual. Your systems and processes include your preferred suppliers. For example, if you are a café, you may want your franchisees to purchase their coffee beans from your preferred supplier so that the coffee across your locations tastes relatively the same.
Requiring your franchisees to purchase from your preferred suppliers may also enable you to receive a greater discount for the network as a whole due to the increased volume of goods being ordered. You do, however, need to ensure that your preferred suppliers are capable of keeping up with the increased demand, and this is where the review of your contracts comes in, because there is no point requiring your franchisees to order supplies from your preferred suppliers if they are not going to be able to keep up with that.
Paul: If we are talking about territory mapping for franchisees, it is more of an area that a franchise consultant can help you with. There are consultants out there that will assist you with specific territory mapping, so you can have a think about your growth plans, you can have a think about how large territories might need to be. The sort of thing to think about is quite often franchisees will expect an exclusive territory, and if you grant too large a regional area to a local franchisee first, it can interfere with your growth plans in the future because you’ll have granted that territory and you can’t necessarily carve it up into smaller pieces if demographics change.
Harmanjot: You can require them to contribute to your national marketing fund and to pay rental fees when you are taking on a lease on their behalf, although these are usually set out in a separate lease, not your franchise agreement. You can also ask for local-level advertisement contributions, software licensing fees, or, if you are providing any services or products to the franchisee, you can actually ask for fees in respect of those as well.
Harmanjot: If you have received a refusal or an opposition to your trademark, it likely means that if you were to operate your business under that branding, you may be on the receiving end of some strongly worded legal letters, particularly where there is another business that is already operating under substantially similar branding. They are now also hyper-aware of your business and keeping an eye on your growth, as they have become aware of you because of your attempted registration.
As we have discussed at length in this webinar, a franchise’s IP is its highest-valued asset. It is what your franchisees are paying you for, and it is what determines the value of your franchise network. If you are unable to secure the rights to your branding, your franchisees are likely to see this as a risky investment because they could be required to shut down or rebrand at any time.
If you have been unable to register trademarks in respect of your branding, it may be best to rebrand and then begin your franchising journey to give your business the best possible chances of succeeding.
Paul: This can be a tricky one to work out, but a good rule of thumb is that standalone licensing agreements typically suit situations where another business is using a product or service for which you own the IP. You might have developed a very specific product, they want to use that product in part of their own line, you can give them rights just to the IP in that product. That would be what a licence agreement would cover. It is not replicating your business. So if someone is going to be operating a whole business that’s like yours, franchising is usually the method or the best approach.
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