Expand your business through the franchising business model

04 Sep 2018

Rebecca Young, senior associate in the Commercial Advisory and Private Wealth team considers the legal documentation you might need when exploring franchising. 

The path to becoming a successful franchisor begins long before you sign your first franchisee. As a prospective franchisor you are strongly advised to invest time (and resources) evaluating the market to identify whether there is sufficient customer demand for the products or services you intend to franchise, and what competition already exists. To become a successful franchisor, you will need to differentiate your brand from competitors; both to attract customers and potential franchisees. The early market research you undertake will inform your decision about whether to take the plunge and take further steps (and investment) to franchise your business.

Your market research will help develop your business plan. It is important to critically assess the strengths and weaknesses of your business, the financial viability of franchising and how your business might translate into the franchise model, including how you divide your territories. You may discover that your gross margins are too low to deliver a viable return for you and your franchisees.  Additionally, if your business is heavily reliant upon a skill set that requires professional qualifications or extensive training, this might narrow your pool of potential franchisees or require further regulatory considerations.

At the end of your preliminary market research, which you are well advised to keep under continued review to monitor the market place in which you and your network will operate, and when you have finalised your business plan, you may decide franchising is not appropriate and review other options to grow your business including licensing or capital injection.

If you decide franchising is your desired model to grow, it is a good idea to pilot the franchise for at least 12 months, or more if your business is seasonal, and in a different location to the one from where you currently run your business. A pilot will enable you to identify problems, troubleshoot and stress test the viability of your strategy.

Whilst your pilot is up and running, and when you are confident in your franchise business model, you will need to turn your attention to the legal framework that will govern your franchise.

An initial consideration will be the entity through which you intend to operate your business. If you have traded as a sole trader or in a partnership, we recommend exploring the legal and tax implications of incorporating your business.  You may also wish to consider internal governance documentation that will regulate your own relationships within the business, such as a shareholders agreement or partnership deed.

Prior to piloting the franchise, you are well advised to take steps to protect your intellectual property rights, such as any trademarks, trade names or patents. A franchisor’s brand is one of its most valuable assets. It is also worth reflecting where you intend to take your franchise over the next five, ten or 20 years and if you need to register rights in another country.

Consider collaborating with a franchise consultant on how to market your franchise and produce any prospectus or marketing literature, which will often be the first introduction to your franchise. Your market research and the results of your pilot will inform what information you decide to share with prospective franchisees, and you may consider asking prospective franchisees to enter into non-disclosure agreements in respect of information shared with them. . Furthermore, a franchise consultant can help you determine pricing and territory strategy.

You will require the following core legal documentation to govern your relationship with franchisees:

  • the franchise agreement, which is the principle legal document setting out the obligations and rights of each party, and key terms such as how long the franchise will last, the territory awarded to your franchise, fees payable and financial information you expect to be disclosed to you
  • a manual setting out how the franchise will run day-to-day and which covers aspects from uniforms to marketing to processes including what is to be done, how it is to be done, when and the performance standards applied
  • personal guarantees are often required when your franchisee is a limited company.  Often prospective franchisees will be new to the market and have no prior trading history.  You may decide to seek personal guarantees from those running the business as added security.
  • a deposit agreement

You may also wish to consider a social media policy.  Franchising is built upon a consistent brand and message, which enables the franchise to set itself apart from competitors and is often what customers place trust and confidence in.   As social media continues in its rapid expansion & evolution, franchisors must get to grips with the opportunities and risks it presents.  It will be important to explore the most relevant approach for your network, whether that be centrally controlled or monitored, and draw up a social media policy to fit your requirements.

Other supporting legal documentation that you will need to consider include employment contracts, both for your own business and that you may wish to roll out for the benefit of franchisees, and leases and subleases for premises. 

Our Franchising team aims to provide clear, strategic and commercial advice to enable you to focus on growing and building your business. Our team is committed to understanding your business model, helping you develop a clear strategy around your objectives and grow your business whilst adequately protected.

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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