From implementing solid contracts to regulatory compliance, Fiona Boswell, partner and head of franchising at Fraser Brown Solicitors, enlightens ambitious business owners with their sights set on Blighty
Are you a franchisor looking to bring your brand to the UK? Then there are some key legal considerations to bear in mind before developing a franchise network on these shores.
(1) Consider your trademarking
Franchising in any country is all about branding. So you must ensure your brands are registered as trademarks in the UK to establish a franchise network here. This can be done by extending an existing international trademark registration to apply to the UK under the Madrid protocol or by registering your trademark here in the UK.
Existing EU trademarks will continue to apply to the UK post-Brexit until they’re due for renewal at which point a domestic application will have to be submitted. It would be prudent to do this as soon as possible to avoid later registration issues.
Registration is vital for the growth of your brand in the UK marketplace as it grants you the monopoly right to use the brand, which is subject to the payment of renewal fees. This also applies to the securing of local domain names for your brand and the registration of designs. Note, there’s no requirement to register ownership of copyright in the UK.
Also, check if your brand works in the UK and doesn’t have any adverse associations. Avoid relying on business partners to do this as it can be a costly exercise to practically secure ownership of your brands registered in foreign territories if you fall out with your business partner.
(2) Understand the market
Ensure your business is suitable for the UK market. Get some guidance from specialist franchise consultants on whether your franchise will work in the UK as understanding the local market is key to the success of your business. Ideally, you should have a test run to flag any areas that may need work. The lessons learnt by doing this will be invaluable for the future of your franchise operation.
(3) Choose your growth structure wisely
Next, you’ll need to look at how you want to operate your franchise in this country – there are four ways to do this: individual franchises, master franchises, area franchises and hybrid structures. Setting up an individual franchise involves establishing a limited company in the UK and developing the franchise yourself.
Comparatively, setting up a master franchise involves appointing a company or individual to develop the network in the country for you. The master franchisee trains, recruits and supports the other franchisees whilst you provide some support and control on what the master franchisee does. The master franchisee obtains its income generally from franchise fees and usually a fee based on sales turnover.
Using this approach means you typically receive your income from products sold and a royalty fee from the master franchisee and upfront fee for acquiring the sole right to operate the franchise in the country.
Remember though, you must be confident of the aptitude, integrity and financial standing of this business partner as well as having the time and resources to invest in their development.
The third option is to use area franchises. This is similar to the master franchise but instead of being given the whole of the UK to develop, you appoint them to grow your business in a specific area only.
The final options are joint venture or hybrid management franchise structures that might be more suitable for you depending on the level of control you require and the investment capability of your chosen business partner. Take advice at the outset on your proposals to ensure your inceptual structure meets your requirements. It’s costly to adapt the structure at a later stage.
(4) Upgrade contracts
You’ll need to have appropriate systems, manuals and contracts in place to operate your franchise in the UK. English law doesn’t currently prescribe that you require any particular documentation to operate or recruit for franchises. Neither are you subject to any formal registration or disclosure process like in other European countries.
Likewise, you’re generally not liable to make payments to franchisees when they cease to operate a franchise business in England. However, the British Franchise Association (bfa), the leading trade body for the franchising industry in the UK, recommends that franchisors have a voluntary disclosure document specifying key details about the franchise to disclose information to franchisees prior to them signing up. This is in line with many of the requirements of other European countries. Whilst not a legal requirement, it’s good ethical franchising practice which will help attract quality franchisees and useful evidence to counter any misrepresentation claims.
Without specific legislation governing the operation of franchises, it’s vital to implement robust contracts specifying the obligations of the master franchisor and master franchisee and corresponding contracts with sub-franchisees. These will work in conjunction with your operations manual as the key tools for policing the operation of your franchises. Ordinarily, these contracts are subject to English law and courts as this is where your franchises will be. If you’re an incoming franchisor, this may mean you need to tweak your existing documentation pack to comply with English legislation.
Check the documentation used in other jurisdictions for compliance with the laws here. Issues such as resale price maintenance, cooling off periods and restrictions on passive selling may be wholly inappropriate for use in this country.
(5) Always comply
UK laws impose specific obligations on businesses that can help you police your franchisees. Data protection is an area of extreme sensitivity. Your franchise contracts and corresponding manuals must include clauses that ensure the franchise network is operated in accordance with data protection laws. Anti-bribery is another area heavily policed in Europe, with corresponding fines and risk of imprisonment for businesses that fail to comply.
Businesses must be aware when using the internet and social media. So it’s vital you implement a social media policy for your franchisees, specifying exactly how they can use the internet and social media to avoid tarnishing the brand.
Similarly, remember competition laws prevent outright bans on internet usage as prohibitive of passive selling but measures suitable to legitimately protect your brand are permitted. Get advice on how to structure your contracts to ensure measures concerning the use of social media and the internet can be implemented.
(6) Make it enforceable
Prevention of competition is a key area for any franchisor and your contracts should include appropriately drafted restrictive covenants to legitimately protect your business interests and the goodwill of your brand once a franchisee ceases to operate an outlet. These must be carefully drafted to be enforceable. So take advice.
Likewise, it’s important to ensure you’ve signed non-disclosure agreements with potential investors prior to disclosing sensitive information regarding the operation of your franchise and take some financial payment from them, like a deposit, to make them demonstrate their commitment to the project.
(7) Don’t overpromise
Vet your marketing and recruitment material for compliance with English advertising laws to protect yourself against misrepresentation claims and take special care regarding profit forecasts. It’s best to underpromise as discrepancies won’t only ruin your reputation in the franchise market but may result in later claims from franchisees for fraudulent misrepresentation which can have serious consequences for the company and its directors.
(8) Avoid infringing European competition laws
Competition laws impact on a variety of key concerns for those considering franchising in the UK. Pricing controls are a particularly sensitive area and agreements or concerted practices that seek to control pricing in franchise networks, like imposing minimum or set prices, will fall foul of competition laws rendering your agreements unenforceable. Certain forms of price promotions and restrictions on excessive pricing are permitted but, again, these must be carefully drafted.
If you plan to exclusively supply your franchise network in the UK, any restrictions on the network seeking products elsewhere must be carefully drafted to comply with competition laws. Seek advice on whether this will apply to you as it is a complex area.
(9) Seek sector specialist advice
If your business operates in a heavily regulated area – e.g. drinks, food, hospitality, leisure or the care industry – you’ll need specialist advice on British laws affecting the operations of this type of company. Your choice of business partner should have familiarity with the requirements in the UK or at least trusted specialist advisors to provide guidance on compliance requirements.
(10) Get in with the right crowd
The key to successful franchising in the UK is attracting the right franchisees to your business. Membership or association with the bfa will help add credibility to your brand. Likewise, using suppliers and advisors vetted by the bfa will also ensure you’re receiving the right specialist advice.
Word to the wise – franchising in a new territory merits taking advice on local requirements. Failure to do so can leave you contractually exposed or with a contract that UK franchisees won’t sign. It’s about more than just whether the business fits the UK environment, your contracts must comply too.