A recipe for success
Ed Savory, Partner and Head of Franchising at Leathes Prior, provides the legal ingredients for food and drink franchises
When you talk to people about franchising, it is the fast food and coffee franchises that usually spring to mind. Brands like McDonald’s, Burger King, Costa, SUBWAY and Starbucks being synonymous with the franchising industry.
From a legal perspective, these franchises have much in common with any business format franchise. The franchisor is granting a license to its franchise owners to use the brand and trademark(s), sell certain products and operate a tried and tested business system exclusively, within a certain area, for a period of five or more years. There are, however, certain key elements to a franchise in the food and drink market that require particular attention.
Secret ingredients and secret recipes
These terms are often confused as, more often than not, it is a legal requirement to disclose the ingredients in any food or drink product. However, the recipe (i.e. the amount of such ingredients and the way in which they are brought together) is more likely to be what is actually secret. This is what franchisors will be keen to protect and keep secret.
People often ask whether there is copyright (which protects the expression of ideas in any recorded form) over a recipe and/or whether a recipe is patentable (the right given to an inventor to prevent others from infringing and taking monetary advantage from the invention).
Typically, the answer to these questions is “no”. Copyright will automatically protect the written recipes or menus, but that does not stop someone else from using a recipe and serving the dish as their own. A patent must be new, inventive and of industrial application and must be registered.
Therefore, a franchisor will want to include express provisions within the franchise agreement to make it clear that any secret ingredients and recipes are strictly confidential, meaning that the franchise owner must not, (a) use them otherwise than for the purpose of operating the franchise, or (b) disclose them to any third party, either during the term of the franchise agreement or, importantly, following termination. Another option is for the franchisor to supply the finished product, like a secret sauce, rather than the ingredients and recipe, which means that it will never have to disclose the secret to its franchise owners.
In order to ensure that each of its outlets sell the same product, a franchisor is likely to want to insist that products are sourced from itself and/or its preferred suppliers. This is perfectly acceptable provided that the extent to which the franchisor makes a margin on any such supply arrangements is disclosed to the franchise owner (in broad terms at least) and provided that the franchise agreement is for a period of no greater than five years (in order to not breach EU competition law), unless there is some other genuine commercial justification.
If the franchisor is able to demonstrate some commercial sense to the franchise owner using the preferred suppliers, for example as the quality of products is higher and the price is competitive, then the supply arrangements should be easy to 'sell' to the franchise owners. This will be far more effective than forcing compliance through legal means.
Traditionally, a franchisor would take the headlease over the premises and sub-let to a franchise owner. This affords greater protection to the franchisor, as well as greater control over the franchise owner, and is likely to be the preferred option where the premises is in a key location and likely to build up significant goodwill.
This arrangement may leave a franchisor exposed if the site turns out to be unsuitable and needs to be closed, as the franchisor has primary liability to pay the rent for the remainder of the term, unless it is able to find an alternative sub tenant. Therefore, it is commonplace for a franchise owner to take the headlease and, in turn, grant an option to the franchisor (in a form that should be set out in the franchise agreement) to take over the premises in the event of termination. Note: this is an option exercisable at the discretion of the franchisor.
It is an essential element of a consumer facing franchise that customers enjoy a very similar experience at each outlet. Therefore, the fit-out of restaurants or coffee shops within a network need to be virtually identical. Often, the franchisor will insist that the franchise owner uses its preferred suppliers to ensure consistency remains. As with product supply (see comments above) this is perfectly acceptable.
The process for securing and fitting-out a premises should be clearly set out in the franchise agreement.
Any territory protection being offered to a franchise owner should be carefully considered. If the aim is to open one outlet in every big town and city then the franchise owner will want some assurance that the franchisor will not grant another franchise in its town. However, the franchisor should be cautious so as not to limit its growth potential. A better option may be to grant franchise owners a right of first refusal to open another franchise in the neighbouring territory; this is a system that has proved extremely successful for SUBWAY.
There will, of course, be numerous other issues to address in the franchise agreement and/or the operations manual, like planning, licensing and food hygiene. With a strong franchise agreement, a franchise network has a much better chance of success. For further information on this article or for any legal advice relating to franchising, please contact Ed Savory or any other member of Leathes Prior’s Franchising team.