Amy Leite, a solicitor at Aquabridge Law and franchise specialist, tells us about the legal aspects of starting a franchise.
A franchise is often described as a “business in a box” and in a lot of ways that is what it is. The business concept and way of operating should all be in place ready for the franchisee to use after they have paid an initial fee and signed a franchise agreement.
If you are thinking of buying a franchise, it is essential that you understand the legal aspects, so read on for this guide on franchise law.
Franchisees will often, but not always, be granted a territory of their own to exploit using their franchise business. This will usually be where the franchisee lives or close by. Territories are usually referred to as exclusive, but there are some exceptions to what is actually classified as “exclusive” and in other cases territories can also be non-exclusive.
The right to operate the franchise business using the franchisor’s system will be coupled with ongoing support and training from the franchisor and the right to use the franchisor’s brand in operating the franchise business. However, this does not mean it will be easy.
As with all business the franchisee will be expected to put in the hours and the hard work to make their franchise successful.
Generally, a franchise will be a business which has been set up and developed (over a number of years) into a finely tuned and successful business model.
The franchisor (the company who has developed the business over the years) will have invested much time and effort in getting the business to where it is and should be in a position to share with franchisees its methods and systems of operation which have led to the franchisor’s business being a success.
It is not the franchisor’s job to run the franchise business for the franchisee. Instead they will give the franchisee all of the tools needed, based on their experience, to operate a franchised business.
This will normally include an operations manual detailing the policies, procedures, standard forms and guidance the franchisee will be expected to follow and use on a day-to-day basis.
The franchisee will also be given initial (and ongoing) training by the franchisor on the business system and methods, use of any specialist software/equipment and marketing. The franchisee will also have a level of support and guidance from the franchisor to assist with any queries or operational issues.
When a franchisee buys a franchise they are paying for the right, subject to the terms of the franchise agreement, to operate the franchise business for a limited period of time. Franchises are not granted to franchisees indefinitely – generally when a franchisee first buys a franchise they would have somewhere between a five-year (most commonly) and 10-year term. It is a common misconception that when you buy a franchise it belongs to you and is yours indefinitely. This is not the case.
The term is the period of time the franchise agreement will be in place for and the period of time for which the franchisee has the right to operate the franchise business using the franchisor’s system and methods.
It is important to be aware that when the franchise agreement comes to an end (at the end of the term or if it is terminated) the franchisee no longer has the right to use the business system, methods of operation or branding of the business because they belong to the franchisor and the franchisee was only ever granted a right to use them to run the business during the term of the franchise agreement. This in turn means after expiry or termination of the franchise the franchisee cannot sell the franchise business.
When the term is nearing its end, if all has gone well during the initial term, the franchisee would normally have a right to renew. A right to renew is usually a right to enter into a new franchise agreement (often on different terms) with the franchisor to continue to be a franchisee and to run their franchised branch.
Renewals are also time limited and once a franchisee has renewed once or twice they may not have further renewal rights.
During the franchise term the franchisee should view the franchise as a way to create an income stream. It is important to bear in mind that in addition to paying the initial fee to obtain the rights to operate the franchise the franchisee will pay a weekly or monthly royalty/management services fee for their ongoing support by the franchisor. This is commonly a percentage of monthly/weekly receipts of the business with a fixed minimum fee or just based on a fixed sum.
The value of a franchise business operated by a franchisee can also be realised through re-sale to another person. Any sale of the business would require the franchisor’s consent and would include the franchisee being paid for the goodwill they have built up in their franchise business i.e. loyal customer bases and ongoing contracts (but not for the trademarks or other aspects which belong to the franchisor).
Many franchisees who have made a success of their franchise businesses have been able to sell them on to new franchisees.
*Amy Leite is a solicitor at Aquabridge Law. She has specialised in franchise law for many years. For more in-depth articles on franchise law, click here.