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Legal Considerations for Franchisees: A Guide For Business Owners

Legal Considerations for Franchisees: A Guide For Business Owners

Setting up a franchise is an exciting opportunity to expand your business. However, there are essential legal considerations to address when franchising your business in the UK. Understanding the legal framework governing franchises is crucial for running your franchise network effectively and in compliance with the law. This article outlines the key legal aspects you need to consider when establishing a new franchise.

Personal Guarantee

In the process of taking on a franchise, it’s common for an individual to establish a new limited company as the legal entity for the franchise. In such cases, a cautious franchisor will often request a personal guarantee from a director of the franchisee company (usually referred to as the principal) to ensure the obligations of the franchisee company are met. This precaution is taken because newly formed companies typically possess limited assets to address any claims made by the franchisor in the event of a breach of the Franchise Agreement.

The personal guarantee typically encompasses both the financial and performance obligations of the franchisee. This means that the personal assets of the principal (such as their home, shares in other companies, bank savings, etc.) are potentially at risk of being utilized to settle any claims against the franchisee company, potentially leading to the principal’s bankruptcy. While not uncommon, the franchisee should ensure that appropriate financial and time limitations are specified in the principal’s liability under the guarantee.

Franchisee Fees

Ensuring that all agreed fees are properly outlined in the Franchise Agreement is crucial for franchisees. Typically, the following fees are encountered in a Franchise Agreement:

Initial Fee:

The Initial Fee is usually payable upon signing the franchise agreement. It should not include a profit margin for the franchisor but rather aims to cover the franchisor’s expenses in establishing and expanding the franchise. If the franchisor were to derive significant profit from the initial fee, it might prioritize selling franchises over ensuring franchisee profitability. The amount of the initial fee can vary depending on factors such as the franchisor’s reputation, the franchise’s profitability, the duration of the agreement, exclusivity provisions, etc. On average, the initial fee ranges from 5% to 10% for a successful franchise.

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Service Fee:

The Service Fee is calculated as a percentage of the franchisee’s gross monthly receipts. It compensates the franchisor for providing ongoing support to the franchisee and generates profit for the franchisor. Typically, the Service Fee is set at approximately 8% of gross monthly receipts.

Advertising Levy:

The Advertising Levy is usually around 2.5% of Gross Monthly Receipts. It covers the costs associated with advertising and marketing efforts undertaken by the franchisor to promote the franchise network.

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1. Draft A Franchise Agreement 

There are several critical legal documents you must prepare when planning to franchise your business. Chief among them is the franchise agreement. This contract establishes the foundation of the relationship between you and your prospective franchisees, detailing the rights and responsibilities of both parties.

The specific form of the franchise agreement will depend on the franchise model your business adopts. Nonetheless, it must comply with various legal requirements. For instance, the agreement cannot include clauses that restrict competition, as competition law prohibits businesses from engaging in anti-competitive practices.

Alongside the franchise agreement, you should also create and provide a franchise operations manual to your franchisees. This manual should comprehensively explain:

  • How the business operates
  • How the franchise relationship will function
  • All the necessary information for the franchisee to successfully run their unit

2. Protect Your Business’s Intellectual Property (IP) Rights

Whether you are establishing a new business to franchise or looking to expand an existing business through franchising, it is vital to consider intellectual property (IP) rights.

For those setting up a new business to franchise in the UK, it is crucial to ensure that your desired brand name and trademarks are available. Conducting a thorough search of the UK marketplace to verify the availability of your branding is essential. Using a brand that is already protected by trademark registration could lead to infringement on another business’s legal rights, potentially resulting in legal action against you.

If you already have an established business, your customers and suppliers are likely familiar with your branding and name, which are central to your business’s identity. When franchising, you grant others the right to use your brand and trademark. Franchisees will operate their businesses under your franchise’s name, logo, and products.

Protecting your brand’s reputation through intellectual property rights is crucial. Therefore, take the time to understand and secure your intellectual property rights thoroughly.

3. Support Franchisees Through Training

Setting up a franchise is not a completely hands-off experience. While franchising can reduce some of your day-to-day management responsibilities, you cannot simply step back once a new franchise unit is established. As a franchisor, you will need to fulfill your obligations by providing continuous support to your franchisees throughout your business relationship.

The franchise agreement between you and the franchisee will outline the specifics of the training and support you will offer. This support may include ongoing assistance with marketing, access to the operating systems used within your franchise, and other essential aspects to ensure the franchisee’s success.

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4. Understand Sector-Specific Laws

Certain areas of law are applicable to all franchises, including:

  • Contract law
  • Commercial law
  • Employment law

Depending on the sector in which your business operates, additional laws may also apply. Various industries operate in the UK, each subject to specific laws and regulations. For instance, if your business operates in the cosmetic industry, your franchise must adhere to the relevant laws and regulations governing that sector.

5. Seek Legal Advice for Franchising

In the UK, there are no specific laws governing franchising or the establishment of new franchises. The UK franchise industry is self-regulated, making it an attractive destination for international business owners seeking to set up franchises.

Given the diverse legal landscape that affects franchises and business activities, seeking legal advice is crucial. The legal realm can be complex and nuanced, making it essential to ensure your franchise complies with all relevant laws. Seeking legal advice will help you navigate these complexities and ensure compliance with the law.

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