Franchising is an attractive vehicle for business expansion, allowing franchisors to spread their brand and operational model widely using the foundation of franchisees’ investments, writes Stephen Sidkin, commercial law partner at Fox Williams LLP. However, he continues, before launching a franchise there are various commercial and competition law issues to be aware of in order to ensure its sustainability and legality …
At the outset, it is important to recognise that both franchisor and franchisee need to have the potential to realise a suitable return from the respective commitments to the franchise.
A franchise operates on what is effectively a hub-and-spoke system. The hub represents the business and goodwill which is represented in the brand. The franchises are the spokes. There is a mutual dependence between hub and spokes. If a spoke fails, it could imperil other spokes, and ultimately the hub itself.
It follows that the key component in this respect is the putting in place of a comprehensive franchise agreement which is legally enforceable. The franchise agreement not only sets the terms for the franchisor-franchisee relationship, but also acts as the foundation for the consistent operation of franchise units in alignment with the franchisor’s standards.
A well-drafted agreement will specify the rights granted to the franchisee, including the use of the franchisor’s trademarks, other intellectual property rights, and proprietary business systems. It will also outline the fees involved, such as the initial franchise fee, ongoing royalties, and marketing contributions. The objective is to ensure clarity and prevent future disputes over financial commitments.
Careful attention must be paid to specifying the duration of the franchise agreement and conditions for its renewal (if any). These aspects are crucial, as they define the duration of the franchisee’s rights and the possibility of extending the relationship.
Equally important are the operational standards and procedures defined within the agreement, which are essential for maintaining brand consistency across the franchise network. The provision of training and ongoing support to franchisees should also be documented, ensuring that franchisees are suitably equipped to uphold the franchisor’s quality and service standards.
It is critical that the franchise agreement addresses termination conditions expressly, outlining the grounds for ending the franchise relationship and determining the obligations of both parties post-termination. Such provisions protect the franchisor’s interests and set out the terms under which the franchisee must cease using the franchisor’s brand and return any proprietary materials.
Additionally, in some countries, providing a comprehensive Franchise Disclosure Document (FDD) to potential franchisees is a legal requirement. The FDD can be expected to need to include detailed information about the franchise system, financial performance, and the obligations of both parties. The objective is to inform potential franchisees of the full scope of their commitments.
Brand integrity
Brand integrity is key to any franchise, and marketing and brand management are in turn key to brand integrity. Maintaining suitable and consistent marketing efforts and brand management across all franchise locations is critical for preserving brand integrity.
Franchisors often establish a national marketing fund contributed to by franchisees, which finances broader advertising campaigns. Clear brand guidelines are crucial for ensuring consistency in all marketing materials and communications. Providing franchisees with support for local marketing initiatives also falls under this purview, helping them to effectively promote the brand within their specific markets.
Effective monitoring and quality control mechanisms need to be in place to ensure compliance with the franchisor’s standards. Regular compliance inspections and audits help assess franchisee adherence to operational standards. Implementing performance metrics provides benchmarks for evaluating franchisee performance, identifying areas requiring improvement, and recognising outstanding operations.
Establishing feedback mechanisms where franchisees can communicate concerns or suggestions can help achieve a collaborative and supportive relationship, ultimately contributing to the network’s overall health and, in turn, the integrity of the brand.
Constructing a strong sense of community among franchisees is equally important for nurturing a cohesive network. By establishing franchisee advisory councils, franchisors can facilitate input and foster a partnership-oriented approach. Regular meetings and annual conferences provide platforms for sharing successes, tackling challenges, and promoting best practices. Effective communication tools and platforms are essential for maintaining regular, open communication with franchisees, thereby reinforcing the franchise community and aiding in the smooth dissemination of critical information.
The right franchisee
Recruiting and selecting the right franchisees forms is another important element of a successful franchising strategy. This process should be aligned with the franchisor’s values and business objectives. Potential franchisees’ business acumen, financial stability, and personal alignment with the brand need to be assessed in order to mitigate future risks.
Training and operational support usually play a key part in a franchisee’s success and, subsequently, the franchise. Comprehensive initial training programmes should cover all business aspects, from operations and financial management to marketing and customer service. This foundational training can be expected to set the stage for consistent adherence to the franchisor’s standards.
Continuing support mechanisms, including regular communication, field visits and access to resources, will allow franchisees to maintain high operational standards. An exhaustive operations manual serves as a daily reference guide for franchisees, reinforcing the procedures and standards outlined initially.
UK competition law
When planning a franchise, it is important to be aware of UK competition law, to avoid practices that could be deemed anti-competitive. The key legislation includes the Competition Act 1998 and the Enterprise Act 2002.
The critical considerations are: pricing – under the Competition Act 1998, franchise agreements must not impose fixed or minimum resale prices on franchisees, which could be seen as price-fixing (prices can be recommended, but they cannot be mandatory); territory restrictions – while it is common to grant franchisees exclusive territories, it is necessary to ensure that these do not completely block competition or market entry, which could be seen as anti-competitive behaviour (the legislation allows for territorial exclusivity, but this must not restrict the franchisee’s ability to compete within their territory); and
supplier agreements – if franchisees are required to purchase from designated suppliers, these requirements need to be capable of being objectively justified on the grounds of quality, consistency or efficiency. Overly restrictive agreements could be challenged under competition law if they hinder competition within the market.
Staying compliant with the Competition Act 1998 and the Enterprise Act 2002 ensures that the franchise operates fairly and avoids legal pitfalls.
Franchise foundations
Franchising, from a franchisor’s perspective, involves navigating a complex web of commercial law issues. From drafting comprehensive franchise agreements and selecting the right franchisees to providing thorough training, ensuring consistent marketing, enforcing quality control and managing growth, each step requires careful legal and strategic consideration.
By addressing these commercial issues proactively, franchisors can build a sustainable and thriving franchise network that remains compliant, consistent, and competitive in the marketplace.
