Franchise Lawyers: Get Some Good Advice

Franchising as a model for business expansion and development offers a number of distinct advantages but also carries with it a reasonably high level of risk. Mike Barlow of Leathes Prior explains why franchisors should appoint a BFA Affilliated firm of lawyers

Of course, there is no guarantee that the operation of a successful pilot business or adaptation of a business running successfully from a particular location will make a successful franchise business.

The key for any new franchisor is to be able to identify when professional help is required. This may be in the form of consultants advising on setting up the pilot operation, legal advisors assisting in developing brand strategy and contractual arrangements, financial advisors producing financial illustrations, manual writers or recruitment specialists.

Understandably, costs are likely to be a major concern and the temptation for some franchisors will be to keep costs to a minimum at the outset by cutting corners. While it is necessary to achieve a balance between ensuring that sufficient finance is available to launch and promote the business and to keep costs under control, there should be a clear strategy for the franchise of the business. This will require the judicious use of professional help. There are many examples of cost cutting measures taken by franchisors which come back to haunt the unwary. In the legal arena these may include:

• Failure to protect trade names and intellectual property

One of the most important assets of any franchise business (if not the most important asset) is its intellectual property. Developing a branding strategy will not only involve imaginative design but will require an analysis as to whether proposed brands are capable of being protected (e.g. by way of trade mark/domain name registration where appropriate).

The costs of securing protection at an early stage are likely to be more than off-set in the long term by the added value to the business and avoiding the need for an expensive re-branding exercise when the franchise has been established in areas where there are similar competing brands.

• Use of templates

Superficially, the use of templates for Franchise Agreements (and associated documentation) is attractive. They offer a relatively low cost solution to the need to document the relationship between the parties. The Agreement goes to the core of the business and it is essential that it properly reflects the specific requirements of the franchisor.

The value of the business and the ability of the franchisor to recruit franchisees and develop the business will be severely undermined by a poorly drafted agreement and, in the worst cases, the franchisor will find that provisions may be unenforceable.

• Failure to take legal advice

As well as the franchise agreement, the franchisor will need advice on a number of matters such as the content of the operations manual, terms and conditions of trading, appropriate disclaimers for any prospectus produced, property issues and employment matters. Where the franchisor does not have appropriate in-house expertise it is crucial to identify the needs of the business and to take advice where necessary.

Although good lawyers are never cheap they do not need to be excessively expensive either. Overhead costs will vary significantly between different firms and this is likely to govern the rate charged rather than the experience of the lawyer concerned. Wherever possible, franchisors should consider asking their lawyers to work to pre-agreed budgets for particular items.

What can an experienced BFA Affiliated Firm of Lawyers offer?

BFA Affiliated lawyers will be experienced in dealing with a wide range of franchise businesses and are likely to be aware of the requirements. Rather than simply drafting a suite of standardised documents, an experienced franchise law firm will work closely with the franchisor and its business advisers to help define and refine the franchise package and offering.

Relationships with organisations such as the BFA, financial institutions, consultants and other parties providing services to the franchise community, are also likely to be an important resource.

The Franchise Agreement

The franchise agreement will need to take into account a multitude of matters such as changing EC and UK Competition Law, compliance with the BFA's Code of Ethics (which is particularly relevant when recruiting franchisees) and, of course, the specific commercial requirements of the franchisor. Matters commonly considered will be:

• Specific territory issues such as the
circumstances in which out of
territory sales may be restricted or territory boundaries adjusted

• Conditions on renewal and circumstances where the agreement may be terminated or the rights of the franchisee limited

• Restrictions on the franchisee's activities during the term and after termination or expiry

• Options for the franchisor to acquire the business or certain assets of the business (including any premises)

• The structuring of financial provisions and related performance indicators

The Operations Manual

The agreement will also need to dovetail with the operations manual. An experienced franchise law firm will have developed for its franchisor clients sections for the franchise manual dealing with particular legal issues relevant to the operation of the business. These are likely to include:

• Employment law (including, where
appropriate, standard employment
contracts incorporating provisions to protect the franchisor's business system)

• Terms and conditions for the supply of products and services

• Data protection compliance

• Health and safety legislation

Other Services

Whether you are a prospective franchisor or one that has already established a franchise network, it is important to ensure that the law firm you select has the depth and breadth of experience. A firm's experience in franchising is obviously the first question to ask but it is equally important to establish that the firm is a full service law firm able to provide corporate, employment, property and dispute resolution services in addition to its franchise and intellectual property advice from a dedicated franchise team.

An experienced firm will be able to provide practical advice on a wide range of matters and, where appropriate, will have developed streamlined procedures developed for the benefit of the franchisor. These may include:

• Structures

• Advice on the benefits and drawbacks of operating the franchise through a separate franchise service company and the appropriate structures for the holding and licensing of intellectual property rights.

• Issuing agreements

• Preparing each franchise agreement tailored for the particular franchisee

• Dealing with queries raised

• Ensuring that the agreement is
properly executed and any transaction-specific terms are properly documented

• Attending to any post-completion formalities

Property Procedures

Providing that the franchisor has a right to take over premises on termination and expiry, a law firm will be required to ensure that the leases of premises taken by franchisees include appropriate provisions. With sensible procedures in place duplication of costs and wasted expenditure can be avoided so that the costs of acquisition can be kept at very reasonable levels.

Franchise Re-Sales

Eventually the franchisee may wish to sell on their business. Law firms will be needed to prepare standard form sale and purchase agreements to ensure compliance with the terms of the franchise agreement, advising on any option in favour of the franchisor to purchase the business, overseeing the transaction and recovering any monies due on sale.