A beginners guide to the legal pitfalls of franchising

Fiona Boswell and Philippa Dempster, Senior Associate and Partner of law firm Freeth Cartwright, reveal the legal obstacles you may face when becoming a franchise owner and how best to avoid them.

Taking on a franchise business is not legally the same as owning your own business.

Operating a franchise is having the right to run a ‘business in a box’. You get the right to operate a ‘ready made business’, with a proven system, proven brand and proven range of product/services. You can sell that right, acquire the right to operate more franchises and pass that right on to your heirs. You pay the franchisor an initial investment for the benefit of having that right and for their support and training to help you successfully operate the franchise business.

Starting your own business is just that – your business model has not been tried and tested. You take the risk that your business concept may not have customer-appeal. You have to invest the time, resources and money to find the best way to operate your business, build your own brand and attract (and keep) your own customers. In return for taking on that risk and responsibility, you keep all the reward.

It’s all about your contract

Once you have decided to take on a franchise, your formal appointment as a franchise owner is recorded in a Franchise Agreement. This should contain all the key details about your franchise, from the simple facts – the name – to the key points e.g. your allocated territory, right to renew and fees. If something isn’t covered it can be quite difficult (in some cases, impossible), and certainly very costly to make a franchisor honour promises made but not recorded in the contract.

Some franchises operate in heavily regulated sectors. You will need to make sure your franchise complies with applicable legislation or you risk losing your franchise and paying hefty fines. Before you sign up to your chosen franchise, make sure its contract contains everything that you have agreed with the franchisor. Get a fixed fee review and report from a British Franchise Association affiliated lawyer. These lawyers will flag where your contract falls short of what is standard in the industry.

Make sure you own what others produce for you

Most businesses engage contractors to design their websites. If you do this, legally, although you are paying for the work, the designer owns the content that they create. This can cause all sorts of problems, particularly when you want to sell your business. You can stop this happening by making sure you have a simple contract with the designer that makes you the owner of the content rights to your website.

Get your business structure right

If you want finance the banks will expect a coherent business plan and to interview you to be sure that you know what you are doing. Your franchisor may prepare you for this – otherwise consider consultancy advice. Consider what business structure to use. A limited company protects against access to your personal assets so in a worse case scenario, only the money you have invested in the company and any personal guarantees are at risk.

When you exit be prepared to start afresh

When your franchise is successful it can be a really lucrative business. At that stage you may be tempted to let your contract expire and go it alone – setting up your own similar business under a different name and diverting your custom to it. Legally this would put you in hot water as most Franchise Agreements contain restrictive covenants that prevent you from doing this for a limited time (up to one year) and, in the current climate, franchisors are more than happy to enforce this.