An Interview With a Franchise Consultant
All new franchisees must ensure they have a through grasp of the legal standing of their businesses. The franchise is a special type of business format. A franchise can be run on a sole trader, limited company or partnership basis, but there are additional legal consideration that must be taken into account.ABusinessFranchise spoke with David Marchese, Partner, Davenport Lyons about franchises and the law.
Just to be clear about the relationship between franchisor and franchisee, can you outline the traditional set-up that most new franchise businesses will adopt?David: Franchising can be a profitable way of expanding a business without having to put up the capital expenditure yourself. Essentially, the franchisor provides a bundle of rights, information and expertise, to enable the franchisee to set up a business replicating that of the franchisor. The franchisee will provide the premises, working capital, employees and any other resources necessary to work the franchise. The franchisor may receive a royalty on sales by the franchisee, but sometimes in a retail context the franchisor will get its return by supplying goods for resale by the franchisee.
What key factors - including legal considerations - should a new franchisee look closely at before they sign their franchise agreement?David: To succeed in the franchising venture, you need to have a recognisable business concept worth replicating, and the means to enable the franchisee to do so. In legal terms, this means, first and foremost, having a brand name protected by trade mark registrations in any territory where you are likely to want to grant a franchise. In addition, a franchise business is likely to have various identifiable features that the franchisee will want to replicate, such as the design and layout of premises and other materials to be used in the business. These may be protected by copyright or design rights, but would need to be original in order to enjoy such protection.
Are there any particular laws that new franchisees should be aware of?David: Part of the attraction of a franchising operation is that the franchisee will not have to re-invent the method for carrying on the business. Hence an essential part of the franchise is the existence of a detailed operating manual, describing the distinctive features of the business and how it is run. This, too, should be capable of protection by various intellectual property rights, and so a key element will be the care and attention that has gone into developing the manual.
Finally, there will usually be a very considerable amount of personal interaction necessary in order to enable the franchisee to start up and run the business on an ongoing basis. So a franchisor will need access to suitable personnel who are experienced in the operation of the business and can transfer their know-how by means of training and ongoing assistance.
All franchises will require a legally binding contract to be signed by both parties. What’s your advice to new franchisees?David: Legally speaking, a franchise agreement is a licence of various rights together with the provision of various services by the franchisor. This is coupled with fairly extensive provisions which seek to control how the franchise business is operated, and to ensure that this is done in a way consistent with other similarly franchised operations. These will need to be carefully tailored to suit the precise nature of the franchised business.
As with other licensing agreements, the key legal terms will include the territory of the franchise, whether the franchise will be exclusive to a territory or limited to particular premises, whether any goods or services are to be provided by the franchisor or nominated suppliers, and the approval of any premises where the franchised business is to operate.
In addition, the franchisor will want to ensure that the franchisee keeps to a business plan which sets out minimum sales targets and, if the franchise is granted for a particular territory, minimum numbers of outlets to be opened. The term of the franchise agreement will also need to be agreed, as well as issues such as methods of payment, whether any financial guarantees are required by the franchisor, the terms on which the franchise agreement can be terminated, and whether the franchise can be sold.