Webinar Summary: Is UK Franchising Right for You?

Host (Roisin):
Welcome, everyone, to our webinar, “Is Franchising Right for You? What You Need to Know.”

I’ll be your co-host today. I’m Roisin, and with me is Paul, our Practice Leader in the Franchise Team. He brings a wealth of experience helping business owners navigate the franchise process.

Before we begin, just a few quick housekeeping items: You will receive a copy of this recording and the slides in your email. You can submit any questions in the Q&A box, and we’ll answer them towards the end. We’d also love to hear your feedback, so please complete the feedback survey after the webinar.

By attending, you’re also eligible to receive a complimentary consultation with LegalVision to discuss how we can assist your business. To claim this offer, please leave your contact details in the survey that will appear when the webinar ends or contact us via our website.

Today, we’ll be discussing a few key areas:

• The key indicators of a successful franchise
• The level of support you should expect from the franchisor
• Important location and leasing considerations
• The qualities, skills, and commitment needed to succeed as a franchisee

Now, I’ll hand you over to Paul.

Paul (Practice Leader):
Thanks, Roisin. Let’s start with an uncomfortable truth: many franchisees don’t discover the real costs, obligations, and limitations of their franchise until they’ve actually signed the agreement and paid the fees.

Let’s imagine you’ve researched a successful franchise brand and found one that aligns with your goals. You’re excited about the opportunity, but before you sign anything, it’s essential to understand what you’re really getting into.

Everyone talks about reviewing the franchise agreement, but that’s only part of the story. What about the premises? What about additional fees? What, if any, is the exit strategy if things don’t work out?

If you’re a new entrepreneur or even a seasoned one, buying into a franchise model can be a great way to launch a business. It allows you to bypass some of the most difficult tasks new businesses face, such as brand recognition, demand, and building a customer base.

Today, we’ll cover the critical questions and considerations that often catch new franchisees out—the ones that don’t always come up in the sales pitch. By the end of this session, you’ll know what to ask, what to look for, and the red flags to watch for before you commit to a franchise.

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Paul (Practice Leader) – Continued:
Let’s start with something that surprises most people: In the UK, there are no specific franchise laws. Unlike countries such as Australia or the US, which have dedicated franchise legislation, the UK’s franchise system is regulated through a patchwork of contract law, competition law, and intellectual property law.

What does this mean for you as a prospective franchisee? Well, franchisors have virtually no legal obligation to disclose material information about their business. There are no mandatory requirements around franchise deposits or cooling-off periods, disclosure of litigation history, details of the franchisors or their success rates, or comprehensive breakdowns of all the costs you’ll face. In other words, you need to ask about all these things, or hope the franchisor chooses to tell you.

Paul (Practice Leader) – Continued:
But what about the British Franchise Association (BFA)? Many people ask. The BFA does provide some self-regulation, requiring its members to adhere to a code of ethics and provide a certain level of disclosure to prospective franchisees.

However, this is voluntary. Not all franchisors are BFA members, and even those who are are not bound by legally enforceable obligations. The code isn’t legally enforceable in the same way that legislation would be. While it’s a useful indicator of good practice, it’s not necessarily a safety net.

And when we talk about legal regulation, what about leasing? Property laws are more developed, with substantial legislation and case law surrounding commercial leases. But, crucially, these laws are not designed to protect tenants.

Commercial leasing in the UK operates largely on a “buyer beware” basis, which means you’re responsible for checking all aspects of the property and lease. Landlords have very limited disclosure obligations, and lease terms are typically heavily weighted in favour of landlords. Just like with the franchise agreement, thorough due diligence is essential.

Paul (Practice Leader) – Continued:
Let’s now turn to what some of these areas look like in practice. In practice, it means you need to be asking the right questions of franchisors and listening for the right answers. We’ve set out some of those areas here. I’ll throw out some questions and give you the answers.

How many franchises are already in place? How long has the franchisor been operating? The reason you ask this is to find out whether the network is new and small, or old and small. These questions indicate growth and investment in the network. A new but small network might be okay if you’re paying less to become a franchisee, for example. An old and small network might also be okay if these are complex franchises with a lot of upfront capital and big territories. But it’s a question you should ask to understand what your risk profile is commercially and what you’re entering into.

Another question: Are they happy for you to contact other franchisees? You should always be able to get an inside opinion on franchisee satisfaction. Talking to other franchisees is the way to do that.

Has the sales pitch seemed genuine? What are the fees? Do they seem extortionate for the age and size of the network? Don’t be afraid to ask about fees that aren’t being mentioned. These could include technology, marketing, equipment, fit-out, and other costs often left out of the sales pitch. It’s better to ask up front.

Paul (Practice Leader) – Continued:
Does the franchisor sound confident in their own model? Have they been honest about growth hurdles and the approaches they took to course-correct? It’s always a good measure of a franchisor to see how candid they are. No business is easy or avoids road bumps. That’s the experience you want to leverage. Ultimately, you’re buying into a business where someone’s done most of the hard work before. They’ve experienced a lot, and you want to capitalise on that. That’s one of the reasons you become a franchisee.

Finally, how much support do you get? Ask both the franchisor and the franchisees to understand the true position. Is it just initial training and then a conference every year? Or is the franchisor willing to support you directly with mentoring programs and business advice? The latter will make you feel supported and enable your business to grow.

Paul (Practice Leader) – Continued:
I know I said “finally,” but I have a few more questions on this particular section.

Do they have a head office team behind them? If they’re established, this tells you about their scale. If they’re really new, they won’t have a back office team, and you’ll need to balance that against other considerations like how expensive it is, the product offering, and the franchisor’s enthusiasm. You might be happy to take a risk. If they’ve been established for a long time but don’t have a head office function, that could be an indicator that things are stretched thin, and you might not get much support.

Does their network growth reflect a prospering network or a rushed profit strategy? For example, are they opening 20 new franchises in 12 months without the infrastructure to support them? Rapid expansion can sometimes mean franchises receive limited support, resources, and opportunities because the head office is too stretched. At other times, it may just be a high-growth model. Many service franchises tend to be high growth, lower cost, and attract lots of people quickly. This is a question to gauge whether or not it’s a material issue or concern that you should ask more questions about.

Paul (Practice Leader) – Continued:
The final question for the franchisor, which is not everything you should ask them but important nonetheless: If they’re established, have they remained competitive, or are they too big to pivot and at risk of stagnating? You want to balance remaining current and competitive while not losing your central customer base. If the franchisor has a habit of reinventing the model every time there’s a technological advancement, you should be able to grow with the times but also remain competitive. If they’ve managed to do that over time, it’s a good indicator of future growth.

Let’s now turn to leasing and some of the questions you should ask about leasing in practice. It’s best to have done a lot of research into the leasing side of things or have a way of exiting the franchise if it’s not possible before you sign the franchise agreement. Some of the research and questions would look like this:

What’s the risk approach of the franchisor? Are they taking the lease and subletting it to you, or are they making you take the lease? This is an important question, so don’t overlook it. If you’re taking the lease, you’re liable to the landlord, irrespective of how the business performs. There are pros and cons to that scenario. For example, you have more control over the premises, although franchise agreements will often contain step-in rights for franchisors. If there’s a breach, they’ll have the ability to take the premises or at least that’s what the franchise agreement will allow them to do.

But you also have far more liability for yourself. The other option is that the franchisor might take the lease and then sublet it to you. This is less common in the market, as franchisors tend to prefer franchisees to take on the risk. As a subtenant, you have less control, but you only have to deal with the franchisor on a day-to-day basis. They’ll take care of the relationship with the landlord. Sometimes that makes things simpler.

Paul (Practice Leader) – Continued:
Another question: Is the franchisor going to assist with the location of the premises in a direct and consistent way? This means helping you find the location. This is always a good one to confirm in detail. The reason is that generic franchise agreement drafting will always push this requirement onto franchisees to the point where, if you don’t find premises within a particular time, you’re actually in breach. Quite often, the franchisee doesn’t have the right to terminate for this; it’s actually a right for the franchisor. If the franchisor promises to help you locate premises, you want to ensure that it’s actually in the franchise agreement.

You also want to check whether they’ll charge you for that support, as occasionally, that cost provision will be in there as well.

Another leasing-related question is: Does the franchisor control the fit-out, and have they told you how much that will cost? For most franchise businesses that have premises, the fit-out is a very key and integral part. The look and feel of the business is essentially what you’re buying. A classic example is a food business, where there’s a particular brand, a particular layout, and a specific customer experience. Fitting out like that will come with a cost, depending on what the premises looked like before you fit out. Sometimes, franchisors will control that element, meaning you might have to use their designers or be more limited in your choices. If there’s a cost associated, you should know what that cost is.

Paul (Practice Leader) – Continued:
Finally, can you leave if you can’t find premises, or is that a breach that entitles the franchisor to terminate? We touched on this before. Essentially, sometimes it’s just impossible to find premises in the territory. After months of effort, no one is really at fault; it just hasn’t worked out. Usually, the parties will come to an arrangement, extending the provision or trying a different location. However, if it becomes a sticking point, make sure it’s not just a breach on your part. You want to have an exit strategy.

That exit strategy might involve getting a partial refund of the fees you’ve paid.

Paul (Practice Leader) – Continued:
Another element we need to discuss is about yourself. How does this look in practice for you? Always make sure you’ve given serious thought to what it means to be a franchisee. Some things to consider include: Are you planning on using this as a platform to develop a new skill you can grow independently of the franchise brand? Because if you are, it rarely pans out that way. A franchise is kind of like a business on loan, and you’re largely required to give it back when the franchise ends, including any clients and goodwill you’ve developed for the franchisor.

You’ll also normally be restrained from starting a competing business for at least six months, and often twelve months. These restraints are enforceable. The degree to which they’re enforceable varies, but they are generally enforceable.

Paul (Practice Leader) – Continued:
Consider the rationale for wanting to be a franchisee. Are you doing this because you want to get skills and then develop your own competing business in the next 5 to 10 years? Because that may not be a good long-term strategy.

Another question: Do you want to be locked into this venture for at least 5 years? Most franchise agreements run for an initial term of 5 years, and, broadly speaking, as a franchisee, you won’t have termination rights. You need to make sure you’re happy to commit for 5 years, as that’s most likely the commitment you’ll be making.

Finally, are you happy to follow the franchisor’s guidelines to the letter? Get involved in other people’s marketing campaigns, redesign and redecorate when you’re told to, and generally follow the franchisor’s requirements. You’re almost like an employee but you aren’t. Some franchisors allow a measure of freedom, but this isn’t really your business model or brand, so you won’t have creative freedom, per se. It’s something to consider.

Paul (Practice Leader) – Continued:
Now, let’s discuss the consequences of not getting this right. We’ve covered some important questions and considerations, but why are we suggesting these? What happens when things go wrong? In our experience, issues with premises, undisclosed costs, and fixed contract terms are the most common problems that lead franchisees to seek legal advice, aside from getting the initial franchise agreement reviewed.

Here are some examples of different clients we’ve had:

Paul (Practice Leader) – Continued:
We’ve had clients come to us wanting to exit their agreement due to exaggerated claims, a lack of support in the network, or a lack of innovation and strategy. They didn’t feel the brand was competitive.

Here’s the outcome of that: They’re now tied in because they don’t have a termination right, and the franchisor hasn’t materially breached the agreement. The franchisee is just fed up, but that doesn’t give them the right to terminate.

The franchisee is also paying for a lease they no longer want to be responsible for. And they can’t terminate the lease either, because there’s no break clause, or there is a break clause, but it’s years away. So, the franchisee in this scenario is left trying to negotiate an exit with the franchisor, which can lead to a mutual termination. This is possible, but it’s often not cheap, and it typically results in the restraints continuing to apply.

Paul (Practice Leader) – Continued:
Another scenario: A client can’t find premises, and the franchisor is not helping them, despite promising to do so. In this case, the client can’t exit because there’s no termination right linked to the premises location. They can’t start the business, and the franchisor tells them they’re in breach of the agreement and will terminate within 30 days unless they find premises during that time.

The 30 days passes, and they’re left with the agreement being terminated, the franchisor retaining the franchise fee, and an invoice for the franchisor’s training costs and legal fees for issuing the breach and termination notice. This is clearly unfair, but contractually, many of these actions can be upheld. In this case, you might face an expensive court claim if you want to challenge it in detail.

Paul (Practice Leader) – Continued:
Another example: A client might find premises, but the process takes months. The fit-out ends up being double what the franchisor said it would cost. In this case, the franchise agreement doesn’t specify the cost of the fit-out, and the operations manual—setting out day-to-day procedures and practices—only says that fit-outs will be at cost.

Let’s say the franchisee had no contractual leeway to select a different contractor, so they had to use the franchisor’s contractor. Now, the franchisee is left with the bill, which they’re obliged to pay, but they’re pre-revenue. So, they need to take out further loans to cover this amount. In addition, they’re paying the landlord’s costs to approve the works, including thousands of pounds in legal and surveyor’s fees. Since they don’t have a contract with the fit-out team, they can’t pursue them for defective work. So, they’re left paying off these debts over the first year without making any income.

This is an important lesson in checking that any fees that aren’t disclosed are asked about up front or capped. It’s also a lesson in ensuring you’re not overleveraged. If you need to fund the venture through loans, make sure you’re negotiating concessions on initial payments, such as not paying the royalty for the first 6 to 12 months, for example.

Paul (Practice Leader) – Continued:
The final example: The premises turn out to be in a poor location. This happens a lot. There’s no custom, and the franchise brand is not as strong as you thought. In this case, there’s often little that can be done. There are no exit rights, and the franchisee is really at the mercy of the franchisor. A good franchisor will try to help and find ways to boost custom or resolve the issue. But a franchisor that’s resting on the agreement may just say, “It’s the franchisee’s problem. They’re just not working hard enough.”

At that point, the franchisee might want to liquidate the company, but as is standard in franchising, they’ve likely given a personal guarantee, making them personally liable if the franchise agreement ends due to a breach. This means that even though they operated through a limited company for protection, the franchisor can pursue them personally for damages, putting their personal assets at risk. This is one of the most significant risks in franchising, as it catches people out when they assume the limited company will protect them. Personal guarantees can undermine that protection, but they’re largely unavoidable in the market.

Paul (Practice Leader) – Continued:
So, what should you do to reduce your risks? We’ve touched on due diligence as a key part of mitigating the risks before they arise. Here’s a summary of that:

• Ask all the questions you need and speak to other franchisees.
• A small or new network is a risk, and there are limited ways to mitigate that risk other than reducing your financial commitment.
• You should definitely do premises research before signing the franchise agreement.
• If the franchise agreement needs to be signed before you find premises, which is often the case, include a termination provision that allows you to exit without liability.
• Ask about all the fees, not just the initial fee. Many fees are in the manual, so you won’t know about them until you start training. I always tell franchisees to ask the franchisor for a summary of the day-to-day recurrent fees set out in the manual and what those fees are.
• Ensure you have the capital you need to cover the first year of the business. Proper forecasting is key. Use an accountant or financial advisor to ensure you have enough capital to fund the business and its associated costs for the first year. Don’t assume the business will be profitable from day one—just like any other business.
• Be wary of taking out loans or putting assets up as security, as this can exacerbate any problems if things go wrong.
• Get the franchise agreement reviewed so you fully understand the risks. Franchise agreements are often standard form, and even if they’re not, franchisors rarely negotiate them. The advice you get will help you understand what you’re entering into and whether you’re willing to take on the commercial risk.
• Read the franchise agreement and the lease yourself. Make sure you understand it and know what your obligations are because you’re the one entering into the agreement.
• Ensure the lease term and franchise term align, and negotiate relevant break rights in the lease in case you don’t renew the franchise agreement. For example, if you have a 5×5 franchise agreement, you’ll want a break clause at the midpoint that aligns with the franchise agreement renewal time, because you may not get a renewal and don’t want to be tied into a new lease for another 5 years.

Paul (Practice Leader) – Continued:
To further reduce risks, here are some high-level takeaways regarding franchise systems:

• A good franchise network will depend on what you want to get out of it and how it’s performing. Higher costs mean more due diligence and higher expectations on immediate returns.
• Look for a strong brand already known in your proposed territory, good products with high return on investment, and scalability.
• On the other hand, with a lower-cost franchise, you might have lower expectations, and you might be happy to grow with the franchisor over time while the network improves.
• There’s no hard-and-fast rule on when a business is ready to franchise, but these questions should help you decide whether it’s a good opportunity.
• If we were advising someone starting a franchise, we’d want to see that the business has been trading for at least a couple of years, tested the model in multiple locations with different demographics, has strong buying power, and a solid customer base.
• Finally, be honest about whether being a franchisee is what you want for yourself. If you’re someone who wants to control and grow their business your way, then starting your own brand might be a better option than becoming a franchisee.

Paul (Practice Leader) – Continued:
A word of caution: We tend to say avoid models that sound like employment relationships dressed up as franchise networks. If you’re on the books as a consultant or contractor where the franchisor controls everything—clients, payments from clients—it may not be a true franchise. It’s unlikely to be a growth-oriented business plan.

Initially, these relationships might be lucrative for you, but in our experience, they often become problematic over time. You may face unpaid fees, loss of clients, and problematic franchisors.

Summary and Final Takeaways:

• Ask all the necessary questions and scrutinise the answers.
• Do your property due diligence. If the franchisor is pressuring you to sign, ensure you have an easy exit if premises can’t be located.
• Make sure you’re comfortable with what being a franchisee means in practice. It’s not employment, but it’s also not something you control entirely like starting your own brand.

Thank you, Paul. That concludes the main part of our webinar. You might find our publication Legal Essentials for Franchises useful, available in the resources tab on our website, or you can download it by scanning the QR code below.

Roisin (Host):
You may also be interested in our upcoming events. We have another webinar called “Before You Sign That Lease: What Every Retail Business Must Check” on Tuesday, 19th February. You can register via the link below.

We’re going to answer your questions shortly. While you submit them, we’ll take a minute to tell you a bit about LegalVision’s membership. By becoming a LegalVision member, your business gets unlimited access to our full team of specialist lawyers for all your business’s usual legal needs. Our team can assist you with areas such as unlimited document drafting and reviewing of business contracts, unlimited legal advice consultations, and unlimited domestic trademark registration, among much more.

I think the real beauty of the membership is the cost certainty with fixed monthly fees. You don’t have to worry about unpredictable legal fees and hourly rate bills that seem to just go up and up. So, think of it as having your own in-house legal counsel. We’ll take care of all the business-as-usual legal work so you can focus on running your business.

To learn more about our membership, request a free consultation when the survey appears at the end of this webinar.

We’re now going to hand back over to Paul to answer your questions. While you do that, you’ll see a poll question pop up. We’d appreciate it if you could please answer it. So, over to you, Paul.

Paul (Practice Leader):
Thanks, Roisin. So, we’ve got a few questions.

The first one is: How do you split territories? This is probably more of a question for franchisors, and probably more of a question for a franchise consultant, to be honest. But the general rule of thumb is to look at how you want to grow and what the demand is in that territory based on what you’re offering. If you’re more of a food retail business, your territories might be comparatively small because businesses like that tend to operate according to a delivery radius, such as a 2-mile area with a soft territory.

It also depends largely on how dense the area is. For instance, in London, territories will be small. But if you’re talking about broader regional areas in the UK, territories are usually larger because there will be fewer people, or people have to travel more widely.

Paul (Practice Leader) – Continued:
Next question: Franchising or licensing? The law in the UK isn’t as strict about the boundary between franchising and licensing, but generally speaking, a franchise involves giving a licence over an entire business system. So, someone’s using an entire business system, not just a brand or product. On the other hand, a license arrangement is more discreet, like if I created a piece of artwork and gave you the right to use it for a specific purpose, and you paid me a fee to do so. That relationship might last for a year or a few years. So that’s the key difference. If it’s more of an entire business system, it will lean towards franchising; if it’s more discreet, it’ll likely be a licensing relationship.

Paul (Practice Leader) – Continued:
Next question: Is there a certain metric a business needs to achieve before considering franchising? As we touched on during the session, there’s no specific metric; it’s more of a collection of metrics. Ultimately, each business is different. It largely depends on what you’re offering and how much you’ve grown. It’s a hard question to answer in the abstract, but it wouldn’t just be tied to how much money you’ve made or how long the business has been trading. You could be trading for a relatively short time but have a really popular brand and already expanded into several locations, showing you’ve clearly tested the market and are ready to franchise.

Paul (Practice Leader) – Continued:
The next question: How much cash is needed to put the requirement in place to effectively franchise? If this is from a franchisee’s perspective, it depends on all the costs you’re expected to pay, which will inform your initial investment. You’ll also need to forecast for at least the first year to know how expensive it will be. If this is a question from a franchisor’s perspective, it’s hard to answer. You’ll need to have the budget for all the documents you need to prepare, and a lot of that you might absorb internally. For example, if you’re preparing the operations manual yourself, but it’s hard to quantify how much cash a franchisor might need.

Paul (Practice Leader) – Continued:
The final question we’ve received: From a legal perspective, what are the most common risks businesses face when entering into a franchise arrangement, and how can they be mitigated? Hopefully, the session answered this for you.

We’ve also just received a live question: “I’m looking to franchise my business. Do I need a legal team or a franchise consultant?” The answer is, quite often, you need both. Whether or not you need a franchise consultant depends on whether you have questions about territory mapping, marketing the business as a franchise, or putting together your operations manual. The consultant will focus more on the operational elements of the business, giving you an analysis of how ready you are to franchise, and whether your business is ready for franchising.

However, you’ll always need legal support as a franchisor. I wouldn’t recommend just using a template franchise agreement. A lawyer will handle the legal legwork, including drafting the franchise agreement. A good team will also review everything around the franchise agreement—your corporate structure, branding, terms and conditions, employment relationships, and how the franchisee will implement those in their business. These are the types of things a franchisor’s legal team will help with.

Paul (Practice Leader) – Continued:
We’ve also published franchise manuals and handbooks, and we’ve run webinars on some of these requirements as well.

Paul (Practice Leader) – Concluding Remarks:
I think that’s all the questions we’ve got for today. Thank you, everyone, for joining us. We hope this session was useful. If you have any further questions or would like more assistance, please submit your details in the survey at the end of the webinar, and we’ll get back to you. We also encourage you to check out the resources available on our website, and don’t forget to register for our next webinar.