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Franchise Solicitors


Business growth through brand identity, established systems and quality control.

There are a diverse range of matters to consider when planning either to franchise your business or whether to become a franchisee.

The franchising team at Myerson has considerable experience and has, over a number of years, provided advice and assistance to both franchisors and franchisees.

Our clients trade in a wide variety of industries within the franchise sector and operate both in the UK and internationally. Myerson is an affiliate member of the British Franchise Association.

What is Franchising?

The trend for businesses to choose franchising as a cost-effective means of expansion has grown considerably over the last 30 years and is forecast to continue at national and international levels. Once mostly limited to fast-food restaurants and hotels, franchising has expanded into all business sectors, opening up new forms of product and service distribution.

The term ‘franchising’ has been used to describe many different forms of business relationships, including licensing, distributor agreements and agency arrangements. In its most familiar sense, the term ‘franchise’ has arisen from the development of what is called ‘business format franchising’. Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade as their own businesses under the brand of the franchisor, following a proven business model. The franchisee also receives a package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis (including a predetermined agreement length, with renewal options). 

Key Elements of a Franchise

Typically, a franchise will usually have the following key elements:

  • The franchisor allows the franchisee to use a name which is associated with the franchisor;
  • The franchisee operates his business in accordance with the franchisor’s concept and under the franchisor’s trade name or trade mark so that to the outside world the franchisee is the franchisor;
  • The franchisor exercises continuing quality control over the franchisee;
  • The franchisor provides on going assistance to the franchisee; and
  • The franchisee periodically has to make payments to the franchisor.

Please click on the links below to find out more about Franchising and how Myerson can assist you and your business.

Advising Franchisors

If you have a successful business that you believe offers a business model that is appropriate for franchising or simply have an idea for a pilot scheme that you would like to franchise in the long term, then it is important that you get the right advice and assistance at the outset to give your new venture the greatest chance of success.

Advantages and disadvantages

The main advantages to a franchise are:

  • Franchising offers the opportunity to secure distribution for products or services faster than would be the case if the franchisor had to train up its own employees and develop its own internal marketing, sales and distribution organisation;
  • The use of a franchisee’s capital will facilitate the expansion of a network more quickly than would be the case if the franchisor had to find the funds itself;
  • Many companies involved in the supply of goods or services seek to motivate their employees by linking their remuneration to sales. Franchising takes this one step further by linking the franchisee’s financial well-being to the success of the franchisor’s business;
  • A franchisor, with its increased purchasing power and possibly also reduced overheads, may be able to increase the profitability of small units.

The main disadvantages to a franchise are:

  • The major disadvantage for franchisors is loss of control. While the franchise agreement will impose substantial restrictions on franchisees, it is important to remember that franchisees will be independent third parties who will be seeking to maximise their profits, sometimes at the expense of the franchisor;
  • Part of the franchisor’s profit element is used in supporting an additional entity, the franchisee, in the distribution chain;
  • In involving third parties in their business, franchisors will, inevitably, have to divulge substantial know-how and information concerning their business. The franchise agreement will contain restrictions on the franchisee’s ability to make use of this information for his own purposes but such provisions are often difficult to monitor and enforce;
  • The skills required to control franchisees and provide the back-up are different from those involved in operating a business through employees.

The Structure of a Franchise

An important point for would-be franchisors to bear in mind is that the operation of its own business is and should be treated separately to the operation of the business that is intended to be franchised.

We would welcome the opportunity to discuss your requirements at an early stage. We can advise on corporate structures to ensure that the most appropriate business structure is put in place for the operation of your franchise business.

We can also assist with any equity finance raising exercise and debt finance that may be required in order to finance your new venture. For further information, please click here.

Franchise Documentation

Our franchise team is experienced in preparing the necessary documentation (including British Franchise Association compliant documentation) that you would require to commence your franchising venture, including drafting:

  • license agreements (for pilot schemes)
  • franchise agreements and renewals
  • commitment deeds
  • confidentiality agreements
  • intellectual property licences 

Intellectual Property

We are experienced in reviewing the intellectual property portfolios and advising on what steps need to be taken to protect brands, logos, trade names and other trademarks.

We are able to assist with the registration of trade marks, design rights, database rights, patents and other forms of intellectual property protection or disputes.

To find out more about Intellectual Property and brand management, please click here.

Property

If your franchise relies on the acquisition of commercial property, our dedicated commercial property team is able to advise on the most appropriate property strategies for your franchise venture.

We can assist in the sale or purchase of land or acquisition of business premises including advising on whether head leases and/or subleases should be entered into in respect of such premises.

We can also assist with the drafting, negotiation and completion of leases and can draft the terms of any sub-leases or licenses that you intend to grant to your franchisees.

Employment

Another important factor to consider when franchising your business is whether you require any additional staff to undertake specific roles in relation to the franchise business generally.

Our employment team is able to provide advice and assistance on all matters relating to employment law including the drafting of any necessary contracts of employment, company procedures, policies and handbooks.

You may also wish to consider whether such documents should form the standard basis of all such similar contracts and policies to be rolled out throughout your franchisees’ businesses.

Ongoing assistance from Myerson

During the operation of your franchise business, we are able to provide ongoing assistance in the administration of new franchises, including preparation of the full suite of documents to be entered into by franchisees and ongoing assistance for franchise renewals, sales and disposals.

We can also provide ongoing updating services to keep your franchise documentation up-to-date and in line with any changes to legislation, case law and the British Franchise Association Code of Conduct.

Advising Franchisees

Advantages and Disadvantages of becoming a Franchisee

For a franchisee, there are a number of advantages to operating as a franchise:

  • Research suggests that as many as 50% of franchisees would not otherwise become self-employed were it not for the franchise format;
  • Franchisees do not have to have general business/management skills or indeed specialised knowledge in the proposed business activity;
  • By taking advantage of the franchisor’s name and reputation the lead time in making a business successful may be reduced. This reduces the franchisee’s working capital requirements;
  • Finance may be more readily available to franchisees than those setting up in business on their own account;
  • The risks of business failure are substantially reduced;
  • The franchisee is able to make use of the franchisor’s purchasing power and there may be other benefits relating to the size of the franchisor’s operation;
  • National advertising is undertaken by the franchisor for the benefit of the franchisee;
  • Assistance and training is given throughout the term of the franchise.

A prospective franchisee should also consider the disadvantages of being a franchise which include:

  • A franchisee is subject to substantial control from the franchisor. No restrictions would, in theory at least, be placed on the franchisee were he to set up in business independently;
  • A franchisee will have to pay royalties and/or a mark-up on the goods or services which he receives from the franchisor or his nominated supplier;
  • There may be restrictions on the franchisee’s ability to sell the franchised business or to pass it on to a relative;
  • The franchisee’s operation will be directly affected by the actions or insolvency of the franchisor.

Advice on the Terms of the Franchise Agreement 

When considering entering into a franchise agreement, it is vital that the prospective franchisee gets the agreement reviewed by a solicitor regardless of whether the franchisor is prepared to agree to any amendments. This is necessary so as to ensure that the franchisee fully understands the terms of the agreement.

We regularly review and prepare reports on franchise agreements for prospective franchisees both from a legal perspective and an ethical perspective with reference to the British Franchise Association’s Code of Conduct.

Our franchise team has reviewed a wide variety of franchise agreements from relatively small and newly formed franchises to established and renowned national and international high street chains.

Franchisee Trading Entity

We are also able to provide advice and assistance on the most appropriate structure for you to operate your franchise business and can assist in the formation of companies, LLPs and partnerships.

If you are entering into a franchise agreement with other individuals through a corporate structure (whether a limited company or LLP or partnership), we can assist with the drafting of any necessary shareholders or partnership agreements. These arrangements will set out the basis upon which the individuals have agreed to operate the business.

If you are entering into a franchise agreement by way of a corporate structure, then it is likely that the franchisor will require the directors, shareholders or members to enter into personal guarantees and sureties for sums due or liabilities arising under the terms of the franchise agreement. We can provide advice and assistance on the suitability of personal guarantees and sureties.

Employment

Depending on the nature of your franchise, you may be required to employ staff to assist in the provision of services and/or operation of your franchise.

Our employment department is on hand to provide advice and assistance and draft any contracts of employment, employment handbooks, policies and procedures that you may require to ensure the smooth operation of your franchise.

Should you be in the unfortunate position of having to dismiss an employee, we can provide advice and assistance during the initial stages through to any employment tribunal hearings that may arise.

Property

If your franchise relies on the acquisition of commercial property, our dedicated commercial property team is able to advise on the most appropriate property strategies for your franchise venture.

We can assist in the sale or purchase of land or acquisition of business premises including advising on whether head leases and/or subleases should be entered into in respect of such premises.

We can also assist with the drafting, negotiation and completion of leases and can negotiate the terms of any sub-leases or licences that you may require from your franchisor.

International Franchising

Franchising in the UK is becoming increasingly more international in its scope. There are essentially five ways in which a business can expand overseas using the franchise method:

  • A franchisor grants franchises directly to franchisees in the target country;
  • A franchisor sets up a subsidiary or a branch operation in the target country and that subsidiary or branch acts as the franchisor;
  • A joint venture is set up between the franchisor and a resident of the target country. The joint venture will act as the franchisor in the target country;
  • The franchisor grants a master franchise agreement. The master franchisor is given an exclusive right to operate and grant franchises within a territory. It undertakes to appoint franchisees in the territory on the basis of franchise agreements stipulated by the franchisor;
  • The franchisor grants a master development agreement. The master developer has no right to sub-franchise but is instead obliged to operate outlets itself.

There are a substantial number of factors influencing what form the international expansion of a franchisor should take, but set out below are some of the key issues to be considered.

Direct Franchising

In most cases, direct franchising will not be feasible for the following reasons:

  • Substantial tax difficulties may arise in repatriating continuing fees and other payments from franchisees to the franchisor;
  • It is an essential element of franchising that the franchisor provides adequate consultation, back up and assistance, and in most cases this will not be possible if the franchisor is situated in a different country from its franchisees;
  • The franchisor may have little information and knowledge about the target country;
  • Difficulties may arise in enforcing strict adherence to the franchise agreement and manual if the franchisor is resident in another country.

For these reasons it is unusual for a franchisor to seek to expand by direct franchising, but in some limited circumstances direct franchising may be possible. This will arise in the rare cases where substantial back-up from the franchisor is not required in the target country. It will also arise where the target country is geographically, linguistically and culturally similar to the home country.

Branch or Subsidiary

The advantage of a branch or subsidiary operation is that the franchisor remains in control of the franchise and does not have to share any of the revenue with a third party. The major disadvantage of a branch/subsidiary is that the target country may be a materially different market from the home territory. This may make the target country difficult to exploit without advice and assistance from an existing business within the target country.

Joint Venture

In order to overcome some of the disadvantages of a subsidiary or branch operation, franchisors may consider setting up a joint venture. The partner in any joint venture would be an existing business in the target country with knowledge of the market in that country. Often franchisors, if they decide to adopt the joint venture route, strengthen their position by requiring the joint venture company to enter into a master franchise or development agreement.  There is no direct contractual relationship between the franchisor and sub-franchisees in a master franchise operation. 

Master Franchise Agreement

The grant of a master franchise enables a franchisor to rely on a business entity with local knowledge of the target country. The disadvantage of this approach is the loss of control over the master franchisor and hence the sub-franchisees.

Master Development Agreement

Master development agreements have broadly the same advantages and disadvantages as master franchise agreements, except that the franchisor requires the developer itself to open and operate the franchised outlets. This approach doesn’t spread the risk for the franchisor, but will inevitably lead to greater control by the franchisor because it will have a contractual relationship with the developer. There is no direct contractual relationship between the franchisor and sub-franchisees in a master franchise operation.

Careful Planning

Franchising can have considerable advantages over other forms of marketing arrangements, particularly where a business wishes to maximise brand value using outside resources while still retaining a substantial degree of control. But in order to achieve these ends it is critical for a potential franchisor to consider carefully the structure and terms of his franchise arrangements at the outset. The structure of the arrangements will need to be considered in conjunction with taxation advice (relating to the UK and other jurisdictions where the franchise will operate), accounting advice in terms of formulating a financial model that works for all parties and legal advice in connection with the contractual documentation itself. A badly planned franchise operation can have severely detrimental effects upon a business.

The British Franchise Association

Whether you are an existing franchisor or a new franchisor, consideration should be given to becoming a member of the British Franchise Association (BFA).

Please follow the link to the BFA’s website for details of membership benefits and the criteria for membership: www.thebfa.org

Re-Sale of Franchise Businesses

The franchise team at Myerson have worked with numerous franchisees, in a wide variety of sectors, buying and selling franchise businesses.

One of the most important considerations for a franchisee and an attractive consequence for any business owner, is the value that can be realised from the re-sale of the business in the future.

Structure

A re-sale of a franchisee’s business will take the form of either an asset sale or a share sale.

For further information about asset sales please click here.

For further information about share sales please click here.

Issues Arising in the Franchise Re-Sale Process

Typically, the terms of a franchise agreement will stipulate provisions which give the franchisor a degree of control over the re-sale process, for example:

  • The franchisee must meet certain pre-conditions before selling to a third party. For example, that there are no outstanding breaches of the franchise agreement by the franchisee, that the proposed third party buyer must be approved by the franchisor and that third party buyer must complete the franchisor’s training programme;
  • It is not unusual for the franchisor to have a right of first refusal, in effect allowing the franchisor to buy the franchisee’s business at the same price as offered by the third party buyer;
  • A franchisor may impose an administration fee for reviewing the suitability of the buyer, charge an introducer’s fee where it has introduced the prospective buyer and will insist that all outstanding monies owed to the franchisor (under the franchise agreement or otherwise) are paid. Taken together these costs can be significant and will need to be factored into the realisable value of business.

A further part of the transaction process will involve termination of the franchise agreement between the selling franchisee and the franchisor. The third party buyer will usually be required to enter into a new franchise agreement with the franchisor (rather than taking over any existing franchise agreement) and the franchisee will need to understand the terms of such agreement.

Re-Sale Planning for Franchisors

Ideally, exit planning for franchisees should be incorporated within the franchise system by the franchisor (typically with the franchisor’s operations manual). Franchisees need to understand how they exit and realise value for the business they have built up. Exit planning is important because it provides both goals and focus to the entire journey of the franchisee. Exit planning can be achieved by providing a pre-determined process and pro-forma documentation which are incorporated into the Franchisor’s operation manual and by way of incorporating discussions into the franchisor’s ongoing support and assistance to the franchisee. Different structures and processes will apply to different networks. It is not the case that one size fits all.  It is advisable to seek professional advice and adopt an approach that is tailored specifically to the franchise network in question.

 

Franchise Disputes

Not every franchise opportunity is successful and should disputes arise or if matters do not progress as you would have hoped, our franchise litigation team is able to provide advice and assistance on terminating franchise agreements and any alternative dispute resolution services that you may require.

Please contact us on 0161 941 4000 or email lawyers@myerson.co.uk and a member of the franchise litigation team will be happy to assist you.

 

HOW WE CAN HELP


A member of our specialist team will be happy to discuss your matter without obligation.

Matters involving commercial law are complex; our experience and specialist legal team can provide you with catered advice for your business. If you have a commercial issue then please contact us or call us today on +44(0)161 941 4000 and ask to speak with a member of our team.

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Myerson Solicitors LLP
Grosvenor House, 20 Barrington Road, Altrincham, Cheshire, WA14 1HB

Tel: +44 (0)161 941 4000

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